The limited liability company (LLC) is a business entity that offers limited liability protection and pass-through taxation. An LLC can be managed by either the members or by managers. The LLC allows for pass-through taxation as its income is not taxed at the entity level; however, a tax return for the LLC must be completed. Any income or loss of the LLC as shown on this return is passed through to the owner(s). The owners, also called members, must then report the income or loss on their personal tax returns and pay any necessary tax. As with corporations, the LLC legally exists as a separate entity from its owners. Therefore, the owners cannot typically be held personally responsible for the debts and liabilities of the LLC.
Advantages of an LLC
- LLCs allow for pass-through taxation.
- Members on an LLC are not typically held personally responsible for the debts and liabilities of the business
- LLCs generally have no ownership restrictions.
- LLC members have flexibility in structuring the management of the company
- An LLC does not require as much annual paperwork, or have as many formalities, as a C corporation or an S corporation.
- Written consent of LLC members must be obtained prior to increasing ownership in the company
- Potential customers may perceive an LLC as a more professional entity than a sole proprietorship or partnership
- Fewer Ongoing Requirements. LLCs face fewer state-imposed annual requirements and ongoing formalities than corporations.
- Pass-through Taxation LLCs typically do not pay taxes at the business level. Any business income or loss is “passed-through” to the owners and reported on the owners’ personal income tax returns. Any tax due is then paid at the individual level.
- Establishing Credibility Forming an LLC may help a new business establish credibility with potential customers, employees, vendors and partners.
- Organizational Structure LLCs are free to establish any organizational structure agreed upon by the owners.
- Few Ownership Restrictions. There are few restrictions on who can be an owner of an LLC or how many owners an LLC may have, unlike S corporations.
To form an LLC, articles of organization must be filed with the state and the applicable state filing fees paid.