Which Businesses Are Most Suited To Be LLCs?
Any business may lawfully be conducted as a limited liability company in New Jersey and in most states. Most of the state regulatory agencies and professional bodies have permitted licensees and members to become LLCs rather than simply professional corporations. The following are the types of entities that are best as LLCs:
- Professional practices. Even though a limited liability company, similar to a professional corporation, cannot limit the professional from personally committed malpractice, limited liability companies are effective in limiting the liability to professionals for nonprofessional contractual obligations.
- Joint ventures. Joint ventures between corporations or a corporation and sole proprietor are best organized as limited liability company. This allows the pass-through entity status as well as a limitation on liability. If, however, one of the joint ventures is a “C” corporation, a pass-through entity may not be desired due to the dividend exclusion for “C” corporations. There is no advantage for a joint venture to be a partnership.
- Real estate activities. Real estate investment and development businesses are ideally limited liability companies. Typically, small real estate investments are inappropriate as a limited partnership because all of the partners exercise management and control. The limited liability company allows the members to exercise management and control and participate in the operations of the investment without risking loss of the liability limitation.
- Startup businesses. Startup businesses are most likely better as a limited liability company than any other form of entity. The tax pass-through of initial start-up losses can be very advantageous. The question frequently becomes a choice between a sole proprietorship versus limited liability company.
- Estate planning/intergenerational transfer. A closely held business in the form of a limited liability company can be more easily transferred to the next generation over a period of time than an “S” corporation or “C” corporation. Because the limited liability company has all the flexibility and options of a partnership, the older generation can retain control while slowly passing some of the interest to the younger generation. Ultimately, as the older generation members of the LLC retire, control can be passed to the next generation while beneficial ownership can be retained by the older generation allowing the step-up in basis for estate tax purposes.
- Other pass-through entities. Other pass-through entities are better as an LLC than an “S” corporation or partnership. These includes the following:
- Construction and contracting companies
- Farming operations
- Investment companies