No doubt if you have had commercial dealings with businesses in the U.S. you will have seen the letters LLC following the name of an organisation on invoices, advertisements and brochures. We are often asked, "what exactly is an LLC?"
A Limited Liability Corporation ("LLC") is best described as a hybrid form of business vehicle, being a cross between a partnership and a corporation. LLC’s are only relatively new on the American business landscape and are registered on a state by state basis.
The LLC has now become the most popular form of business entity in America.
The advantages of an LLC include the following:
- unlike a corporation, an LLC is owned by its members as opposed to shareholders;
- members enjoy the prima facie benefits of limited liability of a corporation;
- the paperwork for establishing and for maintaining an LLC is relatively straightforward and inexpensive, the principal document being what is known as an "Operating Agreement";
- for taxation purposes an LLC is treated as a pass through vehicle meaning the LLC itself is not liable for tax, rather the individual members pay tax on their proportionate share of LLC income.
For Australians wishing to do business in the U.S. an LLC is undoubtedly the simplest and most effective legal entity. In particular, if an LLC is comprised of a sole member, then effectively the LLC becomes a disregarded entity or pass through vehicle, and the income or loss is treated for tax purposes as solely in the hands of the individual member.
This tax treatment has the advantage of avoiding what would otherwise be a situation for other forms of corporations where earnings are taxed twice, both at the corporate entity level and again in the hands of shareholders.
Finally, as most states in the U.S. do not currently have detailed governance and other restrictive regulations, an LLC has significant flexibility in establishing how it is run and governed.