LLC Limited Liability Company
It is a legal form of company offering limited liability to its owners. It is similar to a corporation, but is suitable for smaller companies with restricted numbers of owners.
The concept of a limited liability company was developed in Germany in 1892 as the Gesellschaft mit beschränkter Haftung (GmbH). Unlike a public limited company, it can only have a limited number of owners.
The limited liability company form was introduced relatively recently to the United States. An LLC provides limited personal liability to owners of its equity interest, similar to a corporation and a limited liability partnership and in contrast to a general partnership or sole proprietorship. A variant of the LLC available in some jurisdictions, typically limited to licensed professionals such as lawyers, physicians, or engineers, is the professional limited liability company (denoted by "P.L.L.C." or "PLLC"). Although some people refer to LLC as "limited liability corporations", the correct terminology is "limited liability company".
Basically, an LLC allows for the flexibility of a sole proprietorship or partnership structure within the framework of limited liability, such as that granted to corporations. An advantage of an LLC over a limited partnership is that the formalities required for creating and registering LLCs are much simpler than the requirements most states place on forming and operating corporations; because of the lack of requirement for annual meetings of shareholders (LLCs have "members") or bylaws, for instance - however, most LLCs will choose to adopt an Operating Agreement or Limited Liability Company Agreement to provide for the governance of the Company, and such Agreement is generally more complex than a corporation's bylaws. Note, too, that some states such as New York require an operating agreement.
For purposes of U.S. tax law, a curious feature of the LLC--a feature unknown to many business people and even some accountants--is that an LLC can elect how it should be treated for federal and often for state income tax purposes. An LLC with one owner, for example, is treated as a sole proprietorship by default (when an LLC has a single owner - either an individual or an entity - it is a disregarded entity for federal tax purposes) but this one owner LLC can also elect to be treated as a C corporation or as an S corporation. Further, an LLC with more than one owner is treated as a partnership by default but a multiple owner LLC can also elect to be treated as a C corporation or as an S corporation. To elect C corporation treatment, an LLC files a form 8832 with the IRS. To elect S corporation treatment, an LLC files a form 2553 with the IRS.
One reason that businesses choose to be organized as an LLC is to avoid "double taxation." A traditional corporation is taxed on its income, and then when the profits are distributed to the owners of the corporation (i.e., the shareholders), then those dividends are also taxed. With an LLC, income of the LLC is not taxed, but each owner of the LLC (i.e., each member) is taxed based on its pro rata allocable portion of the LLC's taxable income, regardless of whether any distributions to the members are made. This single level of taxation can lead to significant savings over the corporate form. Similarly, under some circumstances, members of an LLC may deduct losses of the LLC on their personal tax returns.
Another reason that businesses choose to be organized as an LLC is to exploit the tax classification flexibility that LLCs allow. A new business experiencing losses might choose to operate as a sole proprietorship or partnership in order to pass through those losses to the owners. A slightly more established business might operate as an S corporation to save on self-employment taxes. A large mature business with many owners might operate as a C corporation.
Advantages of an LLC:
• No requirement of an annual general meeting for shareholders
• Pass-through taxation (i.e. no double taxation).
• Limited liability (meaning that the owners of the LLC, called "members," are protected from liability for acts and debts of the LLC)
• Using default tax classification, profits taxed personally (at the member level, not at the LLC level).
• Can be set up with just one natural person involved.
• Membership interests of LLC's in some states can be assigned, providing the assignee with the economic benefits of distributons of profits/losses (like a partnership), without transferring the title to the membership interest (i.e., See Delaware LLC Act).
• LLCs in some states are treated as entities separate from their Members (See VA LLC Act), whereas in other states they are not considered to have separate juridical standing from their members.
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