Volume 3 Issue 4-- July/August 1999
What is the sum of these Roman Numerals? If you said, "Zero; they aren't Roman numerals at all; they're letters that, in accordance with Virginia law, are part of some entities' names," you would be correct.
"Why," you may be asking, "is Virginia (and other states) requiring that this alphabet soup be used after the names of some business entities?" It's because there is a new business kid on the block, when it comes to forming a business.The name of the new entity is Limited Liability Company or Limited Company; hence, the initials above. You can also spell out the whole thing, making for a very long entity name.
History: A long time ago, businessmen (women were excluded then) wanted to limit their liability in business ventures. Stated differently, if Lord Wadbottom invested in a new company to colonize Virginia, called GOVA.com (he was rather farsighted), he did not want to lose his castle if the venture failed. The British thus developed Limited entities to limit Lord Wadbottom's business risks, meaning creditors of GOVA.com could seize its assets, but Lord Wadbottom's castle was off limits. You have probably assumed that we Virginians borrowed the term, "Limited," from the British. Wrong! The first Limited Liability Companies were in . . . Wyoming!
Roughly 15 years ago, Wyoming had the then unusual idea of creating a partnership with limited liability. All 50 states have since adopted some version of the Limited Liability Company (LLC) laws. General partnerships do not have limited liability. If GOVA.com were a partnership, the creditors of GOVA.com could seize Lord Wadbottom's castle if the partnership failed. Today, if you want to start, for example, an informal excavating business with your son, you could lose your castle and other assets.
Eventually, as the concept of a partnership with limited liability gained popularity, the IRS blessed LLCs and the race was on to have LLC laws adopted by all states. (Incidentally, Massachusetts, being last, lost this race). As the notion of a partnership with limited liability caught on, there were certain vestiges of prior tax and partnership law that required attention.
For example, requirements that LLCs had to have a fixed life (i.e. 20 or 30 years) and more than one partner have been repealed in Virginia and most states. These recent changes in LLC laws have placed one-member LLCs on a par with one-shareholder corporations.
In fact, a one-member LLC has some advantages over a one-person corporation when it comes to reporting taxable income. A one-member LLC (that was a sole proprietorship, for example) can elect to continue reporting her (women are now allowed) income on a Schedule C. Schedule C is used to report business income of a sole proprietor on her or his Form 1040 income tax return.
LLCs, like partnerships, sole proprietorships, and S corporations, are flow-through entities which means that they do not pay tax, generally speaking. Subchapter C corporations, on the other hand, are taxable entities that pay tax and retain tax attributes that do not flow through to the
shareholders. How does one decide which entity to pick? To keep these newsletters short and allow us to use long names like Lord Wadbottom, we will have to address choosing the entity in the next issue.
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