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Vol. 2009-08 | August, 2009

Business Associations: Limited Liability Companies (“LLC’s”) v. Corporations and Partnerships

Query: What is the Limited Liability Company form of business? What sets it apart from a corporation or a partnership?

Answer: Traditionally, most privately-owned businesses have organized and operated as corporations or partnerships. In the mid-1990’s a new form of business organization called the limited liability company (LLC) was recognized in Ohio. This entity combines many of the more favorable aspects of the partnership and the corporation, while excluding many of the less favorable features of those business forms. Consequently, an increasing number of business owners are finding that the limited liability company is a suitable entity choice for their business.

A limited liability company, like a corporation, is a legal entity separate from its members. It may be formed by two or more individuals or members. The members may themselves be a legal entity such as a corporation, association or trust. Limited liability companies offer the major tax advantage that a partnership does and a corporation does not. That is, taxation on profits is only at the individual level, and not also at the company level. Consequently, profits in a limited liability company avoid being taxed twice the way they are in a corporation. While this is also true for the “S” corporation form of business that allows owners to have the same tax advantage, a limited liability company has far fewer restrictions imposed on it than the “S” corp.

The limited liability company is also very favorable to members with regard to liability. In a corporation, owners are only liable up to (the limits of) their investment. In a partnership, partners have unlimited liability for contracts entered into, and for the wrongful acts committed by other partners. The limited liability company (LLC) members, however have only the liability that a corporate owner does, up to the amount of their investment.

While it is true that in a limited partnership (LLP) form of business, a limited partner has liability only up to the amount he or she invested, and that a limited partner may not take part in management, in contrast, a member of a limited liability company (LLC) may manage as actively as desired, while still maintaining the limited liability protection under the law.

Selection of the form of business entity, and the contracts for it, should be made with the assistance and guidance of experienced counsel, in order to maximize the benefits available under the law, minimizing risk.

Corporation. An ingenious device for obtaining individual profit without individual responsibility.
Ambrose Bierce, 1842-1914
American satirist, journalist, and short-story writer

AUTHOR / EDITOR: J. NORMAN STARK is an Attorney-at-Law, a Registered Architect, (AIA, NCARB) Registered Landscape Architect, Interior Designer, Planner and Senior Appraiser (ASA), admitted to practice law before the Bar of Ohio, the US District Courts, Ohio and Illinois (Central Dist.), the US Court of Appeals, and the United States Supreme Court. He is a Mediator, Arbitrator and Litigator with experience in Business, Construction Law, and Public Works, and with additional experience in Real Estate, Construction Attorney (Legal Project and Crisis Management), and as an Expert Witness (Forensic Architect). His office is in Cleveland, Ohio.