A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC.
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.
Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation. In a pass through entity, the profits or losses of the business pass directly through to the owners' personal income tax returns, on their Form 1040. The LLC files a Form 1065, and then lists each member's taxable profit on Form K-1. In other words, the LLC itself does not file taxes. However, if the LLC has just one owner, it will be taxed as a sole proprietorship.
Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner.
Additionally, there is a managing member, who also enjoys the rewards of limited liability and is typically the person responsible for managing the business. (However, if the LLC has just one owner, it will be taxed as a sole prprietorship.)
Advantages
- Owners have limited personal liability for business debts even if they participate in management.
- Profit and loss can be allocated differently than ownership interests.
- IRS rules now allow Limited Liability Corporation (LLC) to choose between being taxed as partnership or corporation.
Disadvantges
- More expensive to create than partnership or sole proprietorship
- State laws for creating Limited Liability Corporation (LLC) may not reflect latest federal tax changes
For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to Publication 3402, Tax Issues for Limited Liability Companies (PDF).
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1 comment:
There are many reasons why a new entrepreneur would choose to form an LLC or Limited Liability Company to run their business. New or smaller scale businesses will greatly benefit from having a Limited Liability Company structure. Ordinarily, an LLC will provide a structure for businesses that will reduce operating expenses and maximize gains. A very vital reason to form an LLC is for the protection it provides for the owners of a company.
Massachusetts Limited Liability Company
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