What is an LLC?
A limited liability company is a hybrid between a corporation and a partnership, combining structural flexibility and favorable tax treatment with limited liability for officers and shareholders. An LLC, like a corporation, is an artificial person. In Oregon, LLCs are authorized under the Oregon Limited Liability Act.
Oregon LLCs provide limited liability for members, meaning that no one is automatically liable for the debts and obligations of the LLC simply by virtue of being a member. This does not, however, mean that you can never be held liable for certain business activity. You are always personally liable for your own individual actions, which is something that single-member LLC owners would do well to keep in mind. Limited liability does provide protection from the liabilities created solely by the company or other company actors.
How to Form an LLC in Oregon
An LLC won’t exist in Oregon or any other state unless it is properly formed and filed with the Secretary of State. Articles of organization must be filed with a $100 filing fee (as of 2012) and the LLC must file an annual report and renewal fee each year. If you fail to keep your LLC current, Oregon will administratively dissolve your company, which is something you should endeavor to avoid. At a minimum, the articles of organization must specify the duration of the LLC, its purpose, its principal place of business, its registered agent, and whether it will be managed by members or by a designated manager.
Although not filed with Secretary of State, Oregon LLCs should, especially if they are multi-member LLCs, craft an operating agreement to govern the rights and obligations of its members. The LLC operating agreement is similar to a partnership agreement, containing key provisions amongst members such as buy-sell provisions, distribution schemes, etc.
LLC vs. Corporation
For small business owners, LLCs hold some advantages over corporations. Unlike corporations, LLCs are not subject to corporate level taxes on operating profits, business liquidations, or distributions to its members. LLCs are also able to operate more informally because they are not subject to the rigors of the Oregon Business Corporation Act, which means foregoing formalities surrounding annual shareholder and board of director meetings.
LLC vs Partnership
Partnerships, like LLCs are not subject to corporate level taxes. However, LLCs provide limited liability for their members and officers, whereas general partnerships do not. In a general partnership, partners have personal liability for all partnership debts and obligations.
While a limited liability partnership can provide some protection against personal liability, Oregon only recognizes LLPs for professionals in the following occupations: accountants, architects, lawyers, chiropractors, dentists, landscape architects, naturopaths, nurse practitioners, psychologists, physicians, podiatrists, radiologic technologists, and real estate appraisers.
A third variety of partnership, called a limited partnership, is open to all types of business, provides limited liability and the flexible structure of an LLC, but there must be at least one general partner who remains personally liable for the partnership’s debts and obligations. By contrast, a manager or member of an LLC is not automatically subjected to personal liability for the debts and obligations of the LLC.
How are they taxed?
By default, a single-member LLC is a disregarded entity as far as the IRS is concerned (this does not mean you don’t still owe taxes). A multi-member LLC is generally taxed as a partnership, but may also elect for S-corp tax treatment, which can in some circumstances minimize the amount of self-employment tax LLC to which members are subject.
Disadvantages of LLCs
Although we typically advise small and closely held business owners in Oregon organize as an LLC for the reasons discussed above, there are limited circumstances where other business forms have an advantage:
- If a business is considering a public offering or similar reorganization with another corporation, then a corporation will be better suited;
- Likewise, venture capital firms are sometimes hesitant to invest in LLCs and have historically preferred businesses organized as regular corporations;
- A corporation organized as an S-corp that pays shareholders as employees can sometimes limit payroll and self-employment taxes better than an LLC. But also remember than an LLC can elect to be treated like an S-corp for tax purposes, and that this election can be made each new tax year if the business structure changes to make the S-corp election more advantageous.