Limited Liability Company (LLC)

A Limited Liability Company, or LLC, is not a corporation, although it offers many of the same advantages. An LLC is best described as a combination of a corporation and a partnership. LLCs offer the limited liability of a corporation, while allowing more flexibility in managing the business and organization.  An LLC does not pay any income tax itself. It’s a “flow through” entity that allows profits and losses to flow through to the tax returns of the individual members thus avoiding the double taxation of C-Corporations.

Limited Personal Liability:  Like shareholders of a corporation, all LLC owners are protected from personal liability for business debts and claims. This means that if the business itself can’t pay a creditor — such as a supplier, a lender, or a landlord — the creditor cannot legally come after any LLC member’s house, car, or other personal possessions. Because only LLC assets are used to pay off business debts, LLC owners stand to lose only the money that they’ve invested in the LLC. This feature is often called “limited liability. “While LLC owners enjoy limited personal liability for many of their business transactions, it is important to realize that this protection is not absolute.

Tax Liability:  Unlike a corporation, an LLC is not considered separate from its owners for tax purposes. Instead, it is what the IRS calls a “pass-through entity,” like a partnership or sole proprietorship. This means that business income passes through the business to the LLC members, who report their share of profits — or losses — on their individual income tax returns. Each LLC member must make quarterly estimated tax payments to the IRS.  While an LLC itself doesn’t pay taxes, co-owned LLCs must file Form 1065, an informational return, with the IRS each year. This form, the same one that a partnership files, sets out each LLC member’s share of the LLC’s profits (or losses), which the IRS reviews to make sure the LLC members are correctly reporting their income.

LLC Entity Classification:  Limited Liability Companies are formed and governed by the state laws in which they are formed.  Consequently LLC’s, using Form 8832, can elect how it will be classified for Federal tax purposes, a corporation, partnership, or an entity disregarded as separate from its owner.