Limited Liability Company

Limited Liability Company

A Limited Liability Company, or LLC is a legal form of business organization with daily activities like a partnership but with limited liability similar to a corporation. An LLC is formed in the state in which it operates. An LLC is formed by filing Articles of Organization with the state in which you will be doing business. The owners of an LLC are called "members" rather than partners or shareholders. The members draw up an operating agreement (similar to a partnership agreement) by which they run the LLC. A single-member LLC is taxed as a sole proprietorship, while a multiple-member LLC is taxed as a partnership. An LLC is not recognized as a taxing entity by the IRS. Instead, LLCs are taxed based on the number of members. If the LLC has one member, it is taxed as a sole proprietorship. If the LLC has more than one member, it is taxed as a partnership. The LLC can also choose to be taxed as a corporation.

Advantages of Limited Liability Company

Advantages of Limited Liability Company

Limited Liability: Owners of a LLC have the liability protection of a corporation. A LLC exists as a separate entity much like a corporation. Members cannot be held personally liable for debts unless they have signed a personal guarantee.

Flexible Profit Distribution: Limited liability companies can select varying forms of distribution of profits. Unlike a common partnership where the split is 50-50, LLC have much more flexibility.

No Minutes: Corporations are required to keep formal minutes, have meetings, and record resolutions. The LLC business structure requires no corporate minutes or resolutions and is easier to operate.

Flow Through Taxation: All your business losses, profits, and expenses flow through the company to the individual members. You avoid the double taxation of paying corporate tax and individual tax. Generally, this will be a tax advantage, but circumstances can favor a corporate tax structure.

How a Limited Liability Company pays Income Tax

How a limited liability company pays income tax depends on whether the LLC has one member or more than one member.

Single-Member LLC Income Tax

A single member LLC is taxed as a sole proprietorship. That is, the information about the LLC's income and expenses, and its net income, is prepared using Schedule C. The net income from the Schedule C is brought over to Line 12 of the owner's personal tax return.

Multiple-Member LLC Tax

An LLC which has more than one member is pays income tax as a partnership. The partnership itself does not pay taxes directly to the IRS; the individual partners pay tax based on their share of ownership in the partnership.

The partnership files an information return with the IRS on Form 1065. Then a Schedule K-1 is prepared for each partner, showing the share of the profit/loss of the partnership. The K-1 is filed with the partner's individual return and the gain/loss is shown on the partner's Form 1040.

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