Limited Liability Company Regulations
As defined by the Internal Revenue Service, a limited liability company (LLC) is a business that, under state and federal statute, can be formed and which has a structure that is similar to a corporation. The benefits of an LLC can be found in the owners of the LLC having limited liability personally for any debts and/or activities for the LLC. However, there are certain regulations in place that must be adhered to when creating and maintaining an LLC.
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Recognition
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In 1977, Wyoming was the first state that allowed LLCs to be created and gradually other states began to adopt the practice. The last state to join the LLC recognition team was Hawaii, which passed legislation in 1996. The states typically treat the LLCs as partnerships.
Regulations
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The Internal Revenue Service recognized LLCs created under Wyoming law as qualifying for tax recognition as a form of partnership, rather than as a corporation. The advantage to being treated as a partnership could be found in tax payment, which was significantly lower under a partnership rather than paying out corporate income taxes, which had historically been at a higher percentage. To keep a tight handle on which companies would be forming LLCs, the IRS put in place a strict set of technical regulations that had to be adhered to in order for a company to be classified as an LLC, designed to keep the number of LLCs being applied for at a reasonable level.
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Single Member LLCs
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In 1997, the IRS published a new set of regulations for LLCs that allowed the company in question to apply for taxation as either a partnership or as a corporation, simply by checking the appropriate box on the tax form. At the same time, the new regulations granted single-owner LLC status to an individual, allowing for the tax base to be formed on a non-corporate tax rate, which saved many LLCs money.
State Regulations
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Each of the 50 states has additional regulations that must be adhered to in order for the LLC to be recognized. For example, most states have a requirement for annual financial reports to be filed, along with various filing fees. Some states, such as Texas and Wyoming, also will impose a franchise tax on the LLCs operating in those states, while states such as Tennessee still impose corporate income taxes on the LLCs in operation. Information on each individual state LLC requirements can be found by contacting the state comptroller's office.
Considerations
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While the benefits to an LLC can be significant, it is important to read and understand all state and federal regulations regarding the creation of the enterprise. Failure to do so can have serious tax repercussions and it is always advisable to consult with a professional certified public accountant before establishing any sort of LLC.
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References
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