Limited Liablity Company
This business structure is commonly seen as a hybrid of a corporation and a partnership.
The LLC is good for entities that want to be taxed as disregarded entities or partnerships, that want to reward investors with a larger return of the profits, and for those who do not need the formalities that come with corporations. LLCs are frequently used to hold assets, such as real estate, equipment, or other property.
Liability Protection & Flexibility
Like a corporation, the LLC protects its owners from personal responsibility for its debts or liabilities. LLCs are treated as “legal persons” and can hold title to property, enter contracts, and have the right to sue and be sued. Like a corporation, in most states, the LLC survives when the owners die.
Also like a partnership, the LLC may elect to “pass-through” their profits so that they are taxed as part of the owners’ income. This practice avoids double taxation of both the company and its owners.
LLCs are very flexible and do not have as strict recordkeeping requirements. LLCs can allocate items of income and loss to different owners. They usually do not have to keep recorded meeting minutes.
The terminology for LLCs is different than other legal entities. The LLC owners are referred to as “members.” The LLC may also have “managers” who operate the business. The LLC can be governed by either members or managers. Typically, the owners opt for “manager-managed.” This can help the members avoid liability for management acts that might not fall within the protections offered by the LLC. The managers are similar to the “officers” and “board members” for a corporation.
The ownership of an LLC is described either by “units” or “membership percentages.” This terminology differs from “shares” of “stock” in a corporation. It also differs from “partnership interests” in a partnership.
The governing document for an LLC is usually a “Company Agreement” or “Operating Agreement.” These documents are similar to “By Laws” for a corporation. They set out the rights, duties, and obligations of the parties and explain how the LLC is to be operated.
The LLC is filed with the state. The state governs how to form the LLC and what the legal implications are for the LLC.
The IRS and state tax authorities say how the LLC is taxed. An LLC formed with the state can elect to be taxed as a disregarded entity, partnership, C corporation, or S corporation with the IRS and/or the state tax authorities. This election is made on Form 8832 and, for the S corporation, Form 2553 filed with the IRS.