The limited liability company has been the entity of choice in (and everywhere else in the United States) since Hawaii became the fiftieth of the fifty states to enact a limited liability company law. Its advantages are that it offers the same pass-through taxation as a partnership combined with limited liability for its members as a corporation affords it shareholders. It is the ideal choice of entity for real estate investors and small or even large businesses. It has replaced the general and limited partnership entity choice as well as the Sub-S corporation (which offered the advantage of pass-through taxation) but the disadvantage of corporate operations.
There are two types of limited liability companies: member-managed and manager-managed. Member managed LLCs operate like general partnerships. All members have equal ability and responsibility to manage, control and bind the entity. Manager-managed LLCs operate like limited partnerships: only the manager has the authority to manage, control and bind the entity while the non-manager members have economic rights only.
A limited liability company may have only one member, unlike a partnership which must have at least two members. A single member LLC is however disregarded for tax purposes which means that all its income and tax incidents are reported under the single member’s social security number. It is not required to obtain a Federal EIN. It is however required to obtain a Hawaii general excise tax number and to file general excise tax returns as an entity.
A limited liability company with more than one member should have an operating agreement. The operating agreement is a cross between a partnership agreement and corporate by-laws. Its sets forth the agreement of the partners on how they will share income and tax incidents. It should include agreements like buy-sell agreements in corporations. What if one member wants to withdraw or some members want to buy out others? What if a member dies? These eventualities should be dealt with in the operating agreement to avoid the inevitable disagreements that can ensue when unexpected or unanticipated events occur.
An investor or business operator should form a separate LLC for each business operation or real estate investment. This protects each from losses incurred by the others. Forming it and keeping it in place is inexpensive – only $73.50 to form the LLC and obtain a GET number and $15 for each annual report to DCCA which can be filed on-line.