The Business Environment

Limited Liabitity Companies (LLCs)

A limited liability company (LLC) is a hybrid form of business organization that combines the best aspects of both a corporation and a partnership. It provides its owners (called "members") with corporate-style limited personal liability and the federal-tax tieatment of a partnership.3 Especially well suited for small and medium-sized firms, it has fewer restrictions and greater flexibility than an older hybrid business form - the S corporation (which we discuss in the section on taxes).

Until 1990 only two states, Wyoming and Florida, allowed the formation of LLCs. A 1988 Internal Revenue Service (IRS) ruling that any Wyoming LLC would be treated as a partnership for federal-tax purposes opened the floodgates for the remaining states to start enacting LLC statutes. Though new to the United States, LLCs have been a long-accepted form ofbusiness organization in Europe and Latin America.

Limited liability companies generally possess no more than two of the following four (desirable) standard corporate characteristics: (1) limited liability, (2) centralized management, (3) unlimited life, and (4) the ability to transfer ownership interest without prior consent of the other owners. LLCs (by definition) have limited liability. Thus members are not personally liable for any debts that may be incurred by the LLC. Most LLCs choose to maintain some t)?e of centralized management structure. One drawback to an LLC, however, is that it generally lacks the corporate feature of "unlimited life," although most states do allow an LLC to continue if a member's ownership interest is transferred or terminated. Another drawback is that complete transfer of an ownership interest is usually subject to the approval of at least a majority of the other LLC members. Although the LLC structure is applicable to most businesses, service-providing professionals in many states who want to form an LLC must resort to a parallel structure. In those states, accountants, lawyers, doctors, and other professionals are allowed to form a professional LLC (PLLC) or limited liability partnership (LLP), a PLLC look-alike. One indication of the popularity of the PLLC/LLP structure among professionals can be found in the fact that all of the "Big Four" accounting firms in the United States are LLPs.