All states have either enacted the Uniform Limited Liability Company Act or a law with similar provisions authorizing the formation of limited liability companies. According to these state laws, an LLC can be established for any lawful business purpose. Because of the flexibility of this type of business structure, an LLC is suitable for virtually any type of business enterprise. An LLC is established through the filing of articles of organization with state government. An LLC provides two significant benefits to the owner. First, an LLC provides the same type of liability protection normally associated with a corporation. An owner is not personally liable for the activities of the business organized as an LLC. Second, unlike a corporation, in which an owner faces the prospect of double taxation, an LLC offers a pass-through tax mechanism. With an LLC, an owner faces only tax liability one time.
Types of Businesses
Owners of LLCs are legally known as members. Individuals, partnerships, corporations and other LLCs can organize and become members of an LLC. Any legal entity capable of forming and participating in an LLC is capable of converting its business structure to a limited liability company structure.
Although other entity types may be converted into an LLC, not all businesses lend themselves to such a change or are legally permitted to do so, such as banks and insurance companies. Additionally, some states may impose limitations on the number of legal entities that are permitted to be members of limited liability companies.
The process of converting a business into an LLC differs depending on the type of existing legal entity. A sole proprietorship must reconstitute itself by filing articles of organization with the secretary of state, or similar regulatory agency, in the jurisdiction where it is located. A corporation must typically initiate a shareholders' resolution and obtain a majority vote approving the conversion before filing articles of organization as an LLC. The corporation ultimately must be dissolved with the assets and liabilities being transferred into the newly created LLC. Similarly, partnerships must obtain agreement of the partners. Typically all of the partners must agree to the change, rather than a mere majority of them. Following the approval, articles of organization are filed. The partnership is dissolved and a transfer of assets and debts occurs.
Conversion to an LLC structure often is desirable because the change results in a reduction of the overall tax liability of owners. Owners of an LLC enjoy the benefits of paying taxes only once -- at the individual level. A corporation must pay taxes at the corporate and individual levels. A sole proprietorship would not achieve any tax benefit by converting to an LLC. Indeed, in several states, a sole proprietor who converts his business to an LLC would face an additional franchise tax levied against LLCs because of the limited liability benefit bestowed on that type of legal entity.