1.7 WASHINGTON LIMITED LIABILITY (LLC) COMPANY OR LIMITED LIABILITY
PARTNERSHIP (LLP)
A “limited liability company,” or “LLC,” is a hybrid between a standard corporation and a partnership that combines certain advantages of both entities. Like a corporation, an LLC protects its owners from liabilities that may arise related to the company’s business, as long as the company is properly operated. And, like a partnership, absent an election to the contrary, an LLC’s income and losses pass through to its owners, so that taxes are paid only once at the owner level (assuming that the LLC is properly structured). As with partnerships, a foreign corporation that is a member of an LLC will be considered to be engaged in any U.S. trade or business in which the LLC is engaged. In addition, the Branch Profits Tax may apply to the foreign corporation.
Another advantage of an LLC is that the owners are relatively free to structure the ownership, management and financial affairs of the company as they wish. With a standard corporation, all financial benefits accruing to the shareholders must accrue in direct correlation to the share ownership of each shareholder. This is not the case with LLCs. Setting up an LLC is, in many respects, similar to that for setting up a corporation (as further discussed in Chapter 2) and can be accomplished in a relatively short amount of time by filing a certificate of formation with the Secretary of State and, if desired, adopting a limited liability company agreement or operating agreement.
A “limited liability partnership,” or “LLP,” permits the partners of the LLP to obtain the tax benefits of the partnership form (i.e., pass through of tax consequences to each partner). At the same time, partners have limited liability with respect to obligations of the partnership. For professional service firms that traditionally have operated as general partnerships (such as law firms and accounting firms), the LLP offers the advantage of limited liability to a certain extent without changing the entire structure or the organization of the entity from a partnership to an LLC. It should be noted, however, that the LLP form does not protect a partner from personal liability for (i) his or her own misconduct or malpractice, or (ii) the misconduct or malpractice of those under his or her supervision.
Another advantage of an LLC is that the owners are relatively free to structure the ownership, management and financial affairs of the company as they wish. With a standard corporation, all financial benefits accruing to the shareholders must accrue in direct correlation to the share ownership of each shareholder. This is not the case with LLCs. Setting up an LLC is, in many respects, similar to that for setting up a corporation (as further discussed in Chapter 2) and can be accomplished in a relatively short amount of time by filing a certificate of formation with the Secretary of State and, if desired, adopting a limited liability company agreement or operating agreement.
A “limited liability partnership,” or “LLP,” permits the partners of the LLP to obtain the tax benefits of the partnership form (i.e., pass through of tax consequences to each partner). At the same time, partners have limited liability with respect to obligations of the partnership. For professional service firms that traditionally have operated as general partnerships (such as law firms and accounting firms), the LLP offers the advantage of limited liability to a certain extent without changing the entire structure or the organization of the entity from a partnership to an LLC. It should be noted, however, that the LLP form does not protect a partner from personal liability for (i) his or her own misconduct or malpractice, or (ii) the misconduct or malpractice of those under his or her supervision.