The limited liability company, or LLC, is a relatively new form of business organization authorized by state law. Although LLC regulations differ somewhat from state to state, they all offer limited liability, simplified operational requirements and flexible tax treatment. The LLC is well-suited to the needs of many small businesses.
LLC formation procedures are streamlined -- generally, all you need to do is file Articles of Organization with the secretary of state of the state in which it will be organized, and pay a filing fee, which can be several hundred dollars in some states. The Articles of Organization require you to list the name of the LLC, the names of the members, the principal place of business, the name and address of a registered agent responsible for receiving communications from the state government, and certain other information depending on the state in which it is organized. Some states require you to place a notice in a local newspaper stating your intent to form an LLC.
As a member of an LLC you enjoy limited liability, meaning that you cannot be held liable for the debts of the LLC beyond the capital that you contributed to it. Do not mingle LLC assets with your personal assets, however. The LLC must present itself to the public and to those it does business with as a limited liability entity, so that creditors and potential creditors will not rely on the members' personal assets to satisfy any debts that may arise. If the LLC operates as a sham designed to shield members' personal assets, a court might strip it of limited liability.
LLCs enjoy considerable flexibility in their tax treatment by the IRS. The IRS does not tax LLCs unless they elect to be taxed as corporations -- instead, LLC income is treated as the members' personal income and taxed at individual income tax rates. If the LLC has only one member, it is disregarded for tax purposes, and if it has more than one member, it is taxed as a partnership. If an LLC elects to be taxed as a C corporation, the IRS will tax the LLC at corporate tax rates, and tax distributions to members as the members' individual income. If it qualifies as an S corporation and elects to be taxed accordingly, the IRS will not tax the LLC, but will tax distributions to members as individual income.
An LLC operating agreement spells out the rules governing the structure and operation of the LLC. As of November 2010, no state requires LLCs to create operating agreements. Nevertheless, states do not regulate LLC structure and operation as comprehensively as they do for corporations -- no board of directors is required, for example. If a dispute arises within an LLC with no operating agreement, it might be difficult to determine what standards should be applied to resolve it. Some states allow LLCs to file a copy of their operating agreement with the secretary of state in order to avoid these issues.