22 Limited Liability Companies Flashcards
Which members of a limited liability company have liability for the entity’s debt?
No member has liability for the entity’s debts.
Can members in a limited liability company participate in management?
Yes. Members may participate in management (agents) without restriction and owe the same duties of loyalty and care to the LLC as owed to a limited partnership by the general partner.
Multiple member LLCs can elect to be treated as what type of entity?
Multiple-member LLCs can elect to be treated as a corporation (ie, C corporation, S corporation) or partnership. (If requirements are met and file an S-Corp election).
What is a single member LLC and how is it treated for tax purposes?
If a single-member LLC makes no election, the LLC is treated as a “disregarded entity” and its activities are reported on the individual’s tax return, using Schedule C of Form 1040. Disregarded entities are considered to be the same entity as the owner. This means taxes owed by this type of business are paid as part of the owner’s income tax return.
Describe a member managed LLC.
A member-managed LLC will be bound by the actions of any of its members, who are considered agents of the LLC.
Owners of a limited liability company are referred to as _____.
Members
What type of information is contained in a limited liability company’s (LLC’s) operating agreement?
An LLC operating agreement is used to govern the LLC’s operations, which spells out voting rights, profit/loss allocations, and changes in members for example. This allows LLCs more flexibility than corporations.
What type of information is contained in a limited liability company’s (LLC’s) certificate of formation?
The certificate of formation is the official document that is filed with an appropriate state authority (eg, secretary of state). Like any entity that has limited liability for its owners (eg, corporation, limited partnership), an LLC must file the certificate with the domicile state to do business in the state. Certificate of formation includes:
1. Name and primary place of business
2. Name and address of the LLC’s organizer
3. Name and address of the LLC’s registered agent
4. Whether the LLC is member-managed or manager-managed
5. The LLC’s business purpose
6. Duration
What tax form will a single-member LLC use if the LLC does not make an entity classification election?
If a single-member LLC makes no election, the LLC is treated as a disregarded entity and its activities are reported on the individual’s tax return, using Schedule C of Form 1040.
What are some advantages of forming a business as limited liability company (LLC)?
LLCs are hybrid entities that have characteristics of both partnerships and corporations. They are pass-through entities from a tax standpoint (thereby avoiding double taxation), while they provide their owners, referred to as members, with the limited liability protection of a corporation. Unlike partnerships, even if a member actively participates in the business, the LLC and not the member is liable. This is one reason why businesses are frequently formed as LLCs.
True or False: A limited liability company is always treated as a flow-through entity.
False: Multiple-member LLCs can elect to be treated as a corporation (i.e. C corporation, S corporation) or partnership. Single-member LLCs can elect to be treated as a C or an S corporation (If requirements are met and file an S-Corp election) or as a disregarded entity (e.g. sole proprietorship)
True or False: A member in a multi-member LLC can transfer their interest freely without consent from the other members.
False: Like a general partner in a limited partnership, a member cannot freely transfer an interest, and a new member must be admitted upon the consent of the other members.
What is the loss limitation rule for a member in an LLC?
The loss is limited to a member’s basis + personal loans to company (if any). A member’s basis in the LLC cannot be negative.
If a multiple-member LLC makes no election concerning entity type, what type of entity is the LLC?
If a multiple-member LLC makes no election, the LLC is treated as a partnership for tax purposes. The LLC files a Form 1065 income tax return, and each member of the LLC will receive a Schedule K-1 that flows to their individual tax return (e.g. Form 1040, Schedule E).
How is an LLC terminated?
An LLC terminates by action of state law or by decision of the members.
