A limited liability company, or LLC, is a business entity that has the advantage of offering personal liability protection for its members: LLC members cannot be held personally liable for the debts or obligations of the company. LLCs are also attractive to new business owners because LLCs enjoy many tax advantages as compared to other entities such as corporations and partnerships.
Avoiding Double Taxation
Limited liability companies are not subject to the double taxation that is imposed on corporations. This means that the profits of the LLC only need to be claimed on the individual member's tax returns and not at the LLC level. This is called "pass through" taxation and means simply that the LLC itself does not have to file taxes.
Because the members are taxed and not the LLC, a limited liability company's profit is not treated as earned income of its members and therefore not subject to self-employment tax. However, a managing member's share of that profit is considered income and is subject to the self-employment tax.
Electing Tax Status
A limited liability company has much more flexibility than other business entities in that it can choose whether to file as a corporation, a partnership, a sole proprietorship or an "S" corporation. This flexibility allows the members to choose the tax status that is most advantageous to their organization.
Because it does not have the tax consequences of a corporation, an LLC is subject to much less paperwork and administrative red tape when forming the company and filing taxes.