A Limited liability company, that is commonly called an LLC, is a structure that allows businesses and companies to get the tax benefits of a sole proprietorship or partnership combined with limited liability protection. It ensures that there is no risk to private assets of investors or owners if the company is at risk. It gives publicly listed companies a huge advantage. The formation requirements of an LLC are different across various states.
Since this business structure is relatively new in the industry, some states formed and included an innovation within the structure, which provides distinctive business options and unique tax benefits. Amongst the many innovated structures are the series llc and restricted LLC.
Here are four of the differences between series LLC and restricted LLC.
LLC Accessibility in Various States
Both series LLC and restricted LLC are not accessible in all states. The series llc was initially legalized in Delaware and is only available as an option for eight states, including Delaware, Iowa, Tennessee, Illinois, Texas, Oklahoma, and Utah.
On the other hand, restricted LLCs are surprisingly only available in the state of Nevada. The LLC in that state becomes “restricted” when it makes an election within its articles of corporation.
The Separation of Members and Groups
Both restricted and series LLC have different ways of segregating legal groups, members, and managers of the company. For the former, there are no separations with regard to the members or managers.
The latter type of LLC handles separate official groups, divided as members, owners, managers, interests, or assets. Every group is primarily its own private legal entity, with distinct goals, liabilities, and holdings. This separation aims to safeguard the liability of one order or series from another, although all of them may belong to similar LLC.
Periodic Payments or Distribution
Distribution refers to the periodic payment of some parts of profit from the LLC, which it dispenses to its group members. An LLC can only distribute a limited amount depending on the state’s laws and regulations. Generally, the restricted LLC is limited in the manner of its distribution, whereas the distribution of the series LLC is not limited.
Also, a restricted LLC is not allowed to distribute to its members unless it has been established for ten years. This limitation is created to offer a desirable tax treatment for the LLC’s members. According to the federal tax law, if an LLC interest is gifted from one family member to another family member, taxing the said interest is a must. The tax is applied regardless of whether or not the interest converts to cash unless a state law prevents it. In that case, for a certain period, any benefit from this type of LLC that is gifted amongst the family members shall be tax-free.
Each structure of LLCs has its advantages and disadvantages. Companies and businesses should cautiously evaluate each structure and choose the one that best fits their needs and goals. If the preferred LLC is appropriately maintained and executed, it will become a powerful tool for the advancement of a business.