Guide to Limited Liability Companies

by J. Mariah Brown

A limited liability company (LLC) is a business structure that combines various aspects of a partnership and a corporation. It is attractive to business owners because of its flexibility and because it protects owners from personal liability created by debts held by the business.


According to the U.S. Small Business Administration (SBA), the limited liability company business structure, also known as &amp;ldquo;check-the-box&amp;rdquo; taxation, is a hybrid business structure permissible in most states, including Texas. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. LLC owners, called members, can include multiple corporations, foreign entities, individuals and other LLCs. The number of members of LLCs can vary greatly, ranging from one member to dozens, as there is no limit to the number of members.

Establishing an LLC

To establish an LLC, members must file for a Certificate of Formation of a Limited Liability Company with the Secretary of State of the respective state in which the business is located. In Texas, Form 205 is used to establish LLCs; you can download it at the Texas Secretary of State website. Some businesses, such as insurance companies, cannot be LLCs.

Business Effective Date

The effective date and duration of existence of the limited liability company usually is determined when the organization papers are filed. The LLC&amp;#039;s length of existence can by continued, by a majority vote of the members at the time of expiration. Company members can elect to use a date other than the actual filing date as the effective date of the entity. If members chose to elect a specific effective date, it cannot be more than 75 days before or more than 12 months after the actual file date, according to the Internal Revenue Service (IRS).

Potential Liabilities

While LLCs protect business owners from extensive taxation, there are still potential tax liabilities for which owners may be accountable--including income tax, self-employment tax and estimated tax. Limited liability companies in Texas also are subject to franchise tax.

LLC Tax Classification

The federal government does not recognize LLCs for tax purposes, so LLC business entities must file as sole proprietorships, partnerships or corporations. According to the SBA, four characteristics define a corporation: limited liability to the extent of assets, continuity of life, centralization of management and free transferability of ownership interests. LLCs typically are taxed as partnerships but must file taxes as a corporation if more than two of the previous characteristics apply. LLCs not automatically classified as corporations can file taxes using IRS Form 8832 and elect the chosen business entity on Line 8 of the form. Businesses with two or more members can elect to be taxed as a partnership or corporation. A single-member LLC can elect to be taxed as a corporation or disregarded entity, which keeps the owner&amp;rsquo;s personal taxes separate from that of the business.

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