Limited Liability Company (LLC)

What is it?
LLCs are one of the most recent forms for a business entity that combine many of the advantages of corporations and partnerships. LLC owners (members) generally are not liable for the debts and obligations of the LLC above their initial capital contribution. LLC statutes provide flexibility in organizing the management structure for the LLC, and there can be multiple classes of members having different economic interests and voting rights. An LLC can be designed to have a management and ownership structure that is similar to a sole proprietorship, limited partnership, or corporation. Some states now allow “Series LLCs” that provide owners with the flexibility of organizing one entity with separate operating “series,” and each series is treated like a separate company.

How is it formed?
A formation statement is generally required to be filed with the state, and an Operating Agreement describing the ownership and management of the LLC is generally required to be prepared and signed by the Members. Annual registration statements are also generally required for an LLC.

How is it taxed?
An LLC with one member is taxed like a sole proprietorship, with its income and expenses being reported by the sole member on his or her individual income tax return. For a multi-member LLC, current tax law allows the members of the LLC to “check the box” to choose whether the LLC is taxed as either a partnership or corporation. If the members elect corporate taxation for the LLC, then an election statement must be filed with the IRS.

Who uses it?
LLCs have become the entity of choice and are commonly used by sole proprietors wanting protection from the debts and obligations of the business, real estate owners, and business owners wanting flexibility in designing a management structure and/or choosing the manner of taxation.