A Limited Liability Company, or an LLC, is a relatively new business structure, that first appeared in Wyoming in 1977, and is now recognized by every State's statute and the IRS. An LLC is neither a partnership nor a corporation, but a distinct type of business structure that offers an alternative to those two traditional entities by combining the corporate advantages of limited liability with the advantages of pass-through taxation usually associated with partnerships.
Limited Liability Companies are becoming more and more popular, and it is easy to see why. In addition to combining the best features of partnerships and corporations, LLCs avoid the main disadvantages of both of those business structures. Limited liability companies are much more flexible and require less ongoing paperwork than Corporations to maintain them, while avoiding the dangers of personal liability that come with the partnership. Some examples of famous LLCs may surprise you - both Amazon and Chrysler are organized as limited liability companies.
Owners of an LLC are called "members". Since most states do not restrict ownership, members may be individuals, corporations, and other LLCs - domestic or foreign. LLCs can generally have an unlimited number of members. Most states also permit, so-called, "single member" LLCs, those having only one owner.
Members in an LLC are analogous to partners in a partnership or shareholders in a corporation, depending on how the LLC is managed. A member will more closely resemble a shareholder if an LLC chooses to be managed by a manager or several managers, because then those members who are not managers will not participate in day-to-day management of the company. If an LLC does not choose to utilize managers, then the members will closely resemble partners because they will have a direct say in the decision-making of the company.
An LLC owner by more than one individual or entity is called a Multiple-Member LLC. All states also permit Single-Member LLCs - those having only one owner (member). By default, a Single-Member LLC is taxed as a sole proprietorship (in other words, treated as "disregarded entity" by the IRS), while a Multiple-Member LLC by default is taxed as a partnership.
LLC is a relatively new type of business structure that combines the best features of the corporation with those of the sole proprietorship or partnership. An LLC has many advantages and benefits which cannot be enjoyed together in any other type of business.
Depending on the number of owners, the IRS automatically sees an LLC as a "disregarded entity" or partnership. This kind of business structure brings the limited liability of the company's owners together in much the same way a corporation would have, with that of the pass-through taxation that a partnership would have. LLC advantages in this area involve minimal taxes with generous legal protection.
LLC advantages involving taxes include only filing for taxes once, reduced tax rates, and no double taxation. An LLC is only taxed once regardless of the number of owners. The net income of the business is taxed via a single owner of the company and in some cases the owner can file taxes for the business through their own personal tax return. Depending on the total income of the LLC and the owner, the tax rates of the company may be lower than that of a corporation. This is because an LLC's tax rate is typically figured according to the personal tax rate of the owner. A personal tax rate is often reduced significantly in comparison to that of a corporate tax rate. In addition to the LLC benefits of reduced tax rates, an LLC doesn't have to pay a double taxation as a corporate owner does. Corporate owners pay taxes on their dividend income as well as their corporate net income. An LLC on the other hand does not have to do this. It should be noted that laws regarding the taxation of LLC vary from state and state. What one state does not require an LLC or corporation to pay may be required by another. If you are considering forming an LLC or have questions regarding the benefits of an LLC, be sure to check with the state law requirements for this business option before making a decision.
Forming an LLC, just like maintaining it, is rather simple. After you decide to form an LLC, Articles of Organization must be filed with the state of your choosing, and initial fees must be paid. Once the Articles of Organization are filed (or even prior to that event), the owners of an LLC should have an organizational meeting where an Operating Agreement is adopted, interest certificates, if any, are distributed and other preliminary matters are discussed.
A corporation can be a member of an LLC. This allows you to create an additional level of ownership, which is designed to create an entity that can offer such traditional fringe benefits as retirement plans and an additional level of protection from liability.
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