A Limited Liability Company (LLC) is often described as the combination of a partnership and a corporation. This is because an LLC combines the tax advantages and management flexibility of a partnership with the liability protection of a corporation.
Forming an LLC has become a popular alternative for sole proprietors and partnerships that have thought about forming a corporation in order to protect personal assets. LLC's also avoid "double taxation" because the income of the LLC itself is not taxed at the company level. Instead, taxes on profits and deductions of losses are computed at the individual level on the personal tax return of each LLC member (owner).
Note: LLC owners can elect for the IRS to tax the LLC as a sole proprietorship, partnership, C Corporation, or S Corporation. Owners make this election through the IRS after the company forms with the state.
Advantages of an LLC
Limited Liability. Like the shareholders of a corporation, the owners (called 'members') of an LLC have limited liability for business debts. If the LLC is properly structured and managed, each owner's personal assets will be protected from lawsuits and judgments against the business, so each owner's liability is limited to the amount each has invested in the company.
Pass-Through Taxation. If an LLC has only one owner, the Internal Revenue Service will automatically treat the LLC as a sole proprietor. Similarly, an LLC with multiple owners will, by default, be taxed as a partnership. Owners report their share of the profits and losses of the LLC on their personal tax returns, and no separate tax is assessed on the company itself. Note: If you want your LLC to be treated as a corporation that has to file its own corporate tax return, we can tell you how to file papers with the IRS to make it happen.
Citizenship. All owners of a Subchapter S Corporation ('S Corp') are required to be citizens or permanent residents of the United States. There is no such requirement for a general, or 'C,' corporation or for an LLC.
Management Flexibility. LLC's have much more management flexibility than corporations. Also, an LLC may be managed either directly by its owners or by a manager who may be one of the members or may be hired to run the business. Although an S corporation is limited to 100 owners, an LLC may have an unlimited number of owners.
Simple Recordkeeping. Unlike corporations, LLC's are not required to hold an annual meeting and draft meeting minutes. Note, however, that an LLC does need an operating agreement that will specify how and by whom the company will be managed, each owner's name, the amount of ownership interest held by each owner, and many other items. We can assist customers in writing up their operating agreements.
Deductible Expenses. Similar to a corporation, normal business expenses like an owner's salary may be deducted from the profits of an LLC before the LLC's income is allocated to its owners for tax purposes.
Flexible Profit & Loss Allocations. Unlike a corporation, an LLC is not required to allocate profits and losses in proportion to ownership interest ("member interest'). This means that the owners of an LLC can agree to allocate the company's profits and losses among themselves however they see fit and not necessarily based on the percentage of the company each owner controls.
Nationally Recognized. The LLC is now a recognized business structure in all 50 states and the District of Columbia