Limited Liability Company LLC

A limited liability company, or LLC, can be best described as having the characteristics of a partnership and a corporation. An LLC gives a business the good parts of a corporation without all of the corporate protocols. The multiple owners who are called members of an LLC are looked upon as a partnership for tax purposes.

The LLC is a pass-thru tax structure, so income taxes are paid by its owners, so, unlike a corporation, the LLC itself never pays income tax. As a result, LLC does not suffer from the double-taxation problem that a corporate structure does and the tax burden is passed on directly to the owners. However, an LLC is still obligated to pay state (if applicable) and federal payroll taxes.

At the time of forming a LLC, you choose how to handle income taxes. You can be taxed like a sole proprietor where you are taxed directly, a C corporation where there is double taxation, or an S corporation which is another type of pass thru entity but has the same protections as a C corporation. The choice is yours.

Assuming that the LLC is properly set up, and you completely separate business and personal activities, the owners are afforded personal liability protection. This is a big reason why people choose to form an LLC instead of operating as a sole proprietor. You should also consider that a business generally earns more admiration when it has a formal business structure, such as an LLC.

In the US, the limited liability company is a fairly new business structure. As a matter of fact, as early as 1986, you could create a limited liability company in only two states. Today, every state recognizes this business structure. A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.