Up until the 1970s, corporations were the primary choice for entrepreneurs seeking legal protection and extensive tax benefits. However, with the introduction of the limited liability company, business owners now have multiple options when seeking reduced liability. Unlike corporations, LLCs have flexible management options including unlimited ownership.
LLCs are unique in that there are no restrictions on ownership. LLCs can be owned by individuals, corporations, other LLCs and foreign entities. Corporations can form LLCs to perform a range of duties. However, most states restrict the formation of an insurance company or bank as an LLC. These entities are typically restricted to corporation status.
An LLC owner is called a member. All members are legally protected by the LLC. A corporation member has double protection because of its own incorporation and affiliation with an LLC. LLC members enter into an LLC operating agreement detailing how the company will be run. This agreement is usually formed by an attorney and filed with the Secretary of State or Corporations Commissioner. The operating agreement explains how important decisions will be made on behalf of the entity.
A corporation must file Articles of Organization with the Secretary of State to gain legal recognition as an LLC. Articles of Organization include the names of the members forming the LLC, the name of the LLC and the name of the LLC's registered agent. The registered agent is usually the corporation's legal department or law firm. Registered agents respond to legal notices on behalf of an LLC.
A corporation that forms an LLC must elect to file taxes as a sole proprietor or corporation. Filing as a sole proprietor is easy for a corporation as the business can combine its taxes on Form 1120, U.S. Corporation Income Tax Return. LLCs enjoy the benefit of flow through taxation which means that losses and profits of the business are transferred to the member's tax return. In this case, the corporation can claim the profits and losses of the business instead of filing two corporate tax returns each year.
Benefits for Corporations
Corporations can benefit from forming an LLC when launching a new division or initiative. LLCs can be formed quickly with little administrative burden. In many states, an operating agreement and annual report are not required for an LLC which means the corporation can test an idea or concept through the LLC without releasing financial reports to the public. The corporation can test a variety of ideas through the LLC and adopt it as a part of the corporation if the project is successful.