LEARNING CENTER
Are you ready to form a corporation or LLC but need more information? Find it here.
- Why Consider Incorporating?
- Choosing the Right Entity Type
Limited Liability Company (LLC)
Limited liability companies (LLC) combine aspects of partnerships and corporations.
An LLC combines the corporation's protection from personal liability for business debts and the pass-through tax structure of a partnership or sole proprietorship.
And, while setting up an LLC may be more difficult than creating a partnership or sole proprietorship, running one is significantly easier than running a corporation.
If you're concerned about being held personally liable for debts of your business, then an LLC may be just the thing for you.
Comparison Chart: Compare business entities.
The advantage of a LLC over a corporation is that most states require fewer formalities be observed in comparison to a corporation. The LLC structure requires less paperwork and documentation than with a corporation. For example, with an LLC there is no need for annual meetings or updating the minutes.
Similar to an S-corporation, your LLC is what the IRS calls a "pass-through entity," like a partnership or sole proprietorship. An LLC with more than one member is automatically classified as a partnership for tax purposes.
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. It is not considered a separate tax entity from its owners for tax purposes, whereas a C-corporation is considered separate for tax purposes.
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 with the IRS each year. This form, the same one that a partnership files, sets out each LLC member's share of the LLC profits (or losses).
LLCs can also offer an additional tax advantage over a corporation because the allocation of earnings among owners is flexible. The owners of an LLC can agree to allocate the company's profits and losses among themselves however they see fit, and not necessarily based on what percentage of the company each owner controls.
However, LLC owners can elect to have their LLC taxed like an S-corporation. This may reduce taxes for LLC owners who need to retain a significant amount of profits in the company.
