A Limited Liability Company, or LLC, is a hybrid business structure that combines the management flexibility of a partnership with the limited personal liability of a corporation, notes the IRS. LLCs are created via state statutes, and as of 2010, 47 states have adopted laws permitting the formation of limited liability companies. In the remaining states -- Hawaii, Massachusetts and Vermont -- legislation is pending.
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Types of LLCs
LLC owners are called members and an LLC can be established as either a single-member or multi-member entity. There is no maximum number of members that can own a multi-member LLC. A single-member LLC can elect to be recognized by the IRS as a corporation or "disregarded entity", i.e., a sole proprietor. Multi-member LLCs can be partnerships or corporations. Members of LLCs can include other LLCs and corporations, as well as individuals.
Advantages of LLCs
Formation of a business as an LLC has several advantages. The All Business website notes that because an LLC is formed by members instead of shareholders, the business can be run without having to adhere to requirements such as holding board meetings. Members of LLCs are afforded personal liability protection and the business structure of an LLC allows for more flexibility in distributing income. For example, an LLC can have several interest classes, whereas an S-corporation is restricted to issuing just one type of stock to its shareholders.
Disadvantages of LLCs
While LLCs are popular for their flexibility, there are disadvantages to the business structure, cautions Fairleigh Dickinson University. Most notably, there is no uniformity between states with respect to how state taxes are applied. As a result, LLC owners may incur additional administrative costs in order to review rules in each state where the LLC does business. Additionally, the IRS will not consider an LLC as a partnership for federal tax purposes unless the LLC lacks at least two corporate characteristics such as centralized management and free transferability of interests. However, not possessing these characteristics can make it difficult for an LLC to conduct business.
Taxes and LLCs
The IRS requires LLCs to file a corporation, partnership or sole proprietor tax return. The sole proprietor tax return is filed by single-member LLCs, while LLCs with two or more members can file as a corporation by using IRS Form 8832. If a multi-member LLC does not elect to file as a corporation, it will be classified as a partnership for tax purposes. The IRS notes that certain LLC entities, including insurance companies and some foreign LLCs, must elect to file as a corporation.