Limited liability

What is a Limited Liability Company?

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• published: 22 Apr 2013
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Get a FREE Guide to Form Your Company and Protect Your Assets: https://reference180.com/free-quick-start-guides/ The limited liability company or LLC is the new kid on the block and combines some of the most significant advantages of partnerships and corporations into one. The first LLC was formed in Wyoming in 1977. But LLCs caught on like wildfire due to the personal asset protection and tax flexibility they offered their owners. Limited liability company defined An LLC is a hybrid business entity, combining many of the positive characteristics of both a corporation and a partnership, presumably giving them the best of both worlds. Like a corporation, an LLC is a legally distinct entity, separate from its owners. It has the power to sue and be sued, just like a corporation. It provides similar limited liability protection as that of a corporation, but has the pass-through tax benefits of a sole-proprietorship and partnership. How to form an LLC An LLC comes into existence when prospective members file a charter document with a state's business entities department, which is usually the Secretary of State. The owners of an LLC are called members and membership units represent a member's ownership interest. An LLC can have one or more members. LLC management LLCs offer a flexible management structure. LLCs can be either member-managed or manager-managed. In a member-managed LLC each member has an equal voice in the decision-making processes of the company, much like partners in a partnership. Most LLCs are member-managed. In a manager-managed LLC the members specifically designate a manager or managers, who may or may not also be members, to manage the company, much like officers in a corporation. LLCs and the IRS By default, the IRS treats single-member LLCs as a sole proprietorship and multiple-member LLCs as partnerships, meaning that they are initially treated as pass-through entities. The company itself does not pay income tax. Profits are taxed to the members at their personal income tax rates. However, if the members of the LLC believe it to be advantageous, the LLC can elect to be taxed as either a "C" or "S" corporation by filing form 8832 with the IRS. Advantages of an LLC—limited liability protection, no double taxation, fewer operational formalities, flexibility, enhanced credibility Disadvantages of an LLC—limited legal precedent, restricted transferability, difficulty raising capital, industry restrictions