A limited liability company (LLC) is a hybrid form of business entity that combines several features of a corporation with different key aspects of a partnership. The LLC is treated like a partnership in terms of the tax flow-through aspects, but LLC benefit from the liability protection of limited partnerships or corporations. LLCs differ from limited partnerships in that limited partners are not allowed to become involved in the management of the operations of the business, whereas members of LLCs are not prohibited from becoming involved in managing the operations of the business. There is a catch, however, with the limited liability of the LLC. Although all the members are granted limited liability, very often lenders will require some or all of the members to personally guarantee corporate loans. Remember that a limited liability company is not a corporation or a partnership, but a relatively new hybrid of the two. LLCs are especially suited for smaller businesses with limited numbers of owners.
LLCs are relatively new types of entities. This form of business organization has only recently become widely available in the U.S. As a result, the laws between the various states can differ in how they treat an LLC. So if your LLC has transactions that cross state lines, different states may treat those transactions differently.
There is such a thing as a limited liability partnership. These partnerships are similar to limited liability companies in terms of the advantages at tax time, but limited liability partnerships (LLPs) are only available to select professions, like doctors or lawyers. LLPs are also recognized in fewer states than LLCs.
LLCs are treated as partnerships by the federal government for tax purposes. Individual members are treated as partners, and are therefore subject to self-employment taxes.
Any business that has employees must apply for a Federal Employer Identification Number and pay payroll taxes.
Articles of organization must be filed with the office of the secretary of state; this document contains the name, address, purpose of the business, individuals involved, the registered agent, and other relevant data.
Operating agreements are not required, but are advisable; they can help define and organize your company ownership, profit sharing, and responsibilities.
Advantages
Members can be individuals, partnerships, trusts, or corporations.
There is no limit to the number of members in an LLC.
All members are protected from personal liability for the acts of the LLC or any of the individual members.
Members are allowed to be involved in operational management of the business.
Income, losses, and deductions flow through the LLC to the individual members.
There is a flexible profit distribution process with an LLC.
The LLC requires no corporate minutes or resolutions, so there is less documentation involved.
LLCs avoid double taxation
Disadvantages
There must be more than one member to have an LLC in most areas; single member LLCs are treated as sole proprietorships.
LLCs can be expensive to create and maintain; some states charge an annual fee.
Business owners interested in taking their company public should probably choose a corporate business structure.
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