Checklist for possible conversion of an existing business entity to an LLC
I. Can the business entity operate as a limited liability company?A. Under the laws of most states, banks, insurance companies, and similar businesses are required to be organized as corporations and cannot be organized as LLCs.
B. Some states prohibit LLCs from engaging in other businesses, such as providing professional services.
II. Is an LLC desirable given the characteristics of the owners and the nature of the business?A. How do the advantages and disadvantages of an LLC stack up for this particular entity? An LLC will not be the right form of entity in all situations, and each of the perceived advantages and disadvantages of an LLC should be analyzed for the business under consideration.1. The primary advantages of an LLC are as follows:a. All members and managers enjoy limited liability (unlike a general partnership or limited partnership).
b. There is more flexibility to tailor management than any other form of entity—an LLC may be member-managed (partnership structure) or manager-managed (corporate or limited partnership structure).
c. All members may participate in management without loss of limited liability (unlike a limited partnership).
d. There are no limitations on the number or type of persons that may be members (unlike an S corporation).
e. There can be different types of equity interests held by various owners, allowing income, loss or other tax items to be allocated disproportionately to members (special allocations) and allowing disproportionate distributions to members (unlike an S corporation).
f. An LLC is ordinarily taxed as a partnership for federal income tax purposes, thus avoiding a double tax on its income (unlike a C corporation).
g. As an entity taxed as a partnership, an LLC avoids taxable gain when it dissolves and distributes its assets to its members (unlike an S corporation or C corporation).
h. The members of an LLC do not generally recognize gain when the LLC dissolves and distributes its assets to its members (unlike a C corporation).
2. The primary disadvantages of an LLC are as follows:a. State level filings are required for the organization and continued operation of an LLC (unlike a general partnership).
b. Qualification is required for doing business in other states (unlike a general partnership).
c. An LLC may be dissolved on the death, disability, or withdrawal of a member unless the LLC purchases the member’s interest (unlike an S corporation or C corporation).
d. While the economic interests of members in an LLC are generally transferable, state law often prevents transfers of a member’s voting rights and right to inspect business records (unlike an S corporation or C corporation).
e. Transfer of interests in an LLC may be subject to securities law regulation (unlike a general partnership).
f. Tax-favored fringe benefits, such as employer-paid medical insurance, group term life insurance, and cafeteria plans, are unavailable to LLC members (unlike a C corporation).
g. Income allocated to LLC members is often classified as net earnings from self-employment subject to federal self-employment tax (unlike an S corporation).
h. An LLC may be subject to state taxes, including franchise taxes and corporate income taxes (unlike a partnership).
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