A limited liability company, or LLC, is a relatively new type of business structure authorized by the laws of each state. Developed in the 1970s as an alternative to the corporate business structure, LLCs share many of the characteristics of corporations, but the two exist as completely independent business entities. Federal law allows an LLC to elect to be treated as a corporation for income tax purposes, but this does not make it a corporation under state law.
An LLC is formed by filing articles of organization according to the laws of the state in which it intends to do business. Owners, called members, of an LLC have the benefit of limited personal liability for most debts and obligations of the business, as do shareholders of a corporation. LLCs are easier to operate because they lack the formalities, such as annual meetings of boards of directors and shareholders, of corporations. A disadvantage is that some states do not grant perpetual life to LLCs as they do to corporations.
As do other types of business entities, businesses operating as LLCs must pay state and federal income taxes, but federal tax laws do not recognize an LLC as a tax paying entity. The owners of an LLC must choose to be taxed by the IRS as a corporation, a partnership or, for an LLC with a single member, a sole proprietorship. An LLC that fails to make an election with the IRS is automatically classified as a corporation for federal income tax purposes.
Some states impose certain taxes, such as franchise taxes, directly upon an LLC. State taxes on the business income of an LLC are generally handled in much the same manner as federal income taxes.The process in most states is similar to that of the IRSn with the owners of the LLC making a choice of paying taxes as a corporation, partnership or sole proprietorship. If an LLC fails to make an election with the state taxing authority, the manner in which it will be taxed depends upon the laws of the state.
Impact of Tax Election
An LLC is a separate business entity that must present itself as an LLC when doing business by appending some version of LLC to its name. The way in which an LLC chooses to file tax returns on either the state or federal levels does not alter its business structure under the state law by which it was created. An LLC is recognized as a separate business entity and does not become a corporation, partnership or sole proprietorship merely by electing to be taxed as such on either the state or federal levels.