A Limited Liability Company (LLC) is a state-defined entity that can be thought of as being a hybrid business entity, having some features of both partnerships and corporations.
LLC's are popular primarily because they are more flexible, and are simpler to operate than type S or C corporations. Some think LLCs save taxes, however, most often, they do not.
In some ways, LLCs are similar to corporations. Both LLCs and corporations provide basic liability protection for owners and/or shareholders and officers.
One way LLCs are different is that LLCs have owners, and corporations have shareholders. An LLC can have several owners, called "members" or "partners", named members, for the rest of this article.
An LLC's partnership agreement defines the member relationships in the LLC and includes an ownership agreement.
LLCs can have at least one managing member, and may also choose to appoint officers. LLCs usually have an operating agreement, that describes the LLC's function. LLC members can be any combination of individuals, corporations, and other LLCs.
Double taxation occurs when a company first pays tax on their profits; and then their officers, employees, and shareholders, get taxed again on their individual incomes.
Historically, one of the primary reasons that LLCs were chosen, was for their potential tax savings. LLCs avoid the potential double taxation problems that C-type corporations can have.
Double taxation is not really an important financial issue now, because the IRS has caught up, and removed most of the way taxes could be saved on both common and creative types of income.
Now, there seem to be no tax advantages or disadvantages to forming an LLC. No matter what corporate structure or partnership one picks, they must pay taxes. Tax payments may be split up in different ways, however, one way or another, income is taxed.
Single-owner LLCs are taxed the same as sole proprietorships, and file the same 1040 tax return and Schedule C, as a sole proprietor.
Single-owner entities rarely get the same liability protection that larger companies get. Multiple-owner LLCs may potentially provide better liability protection than some corporations.
Multiple-owner LLCs are taxed the same as partnerships. Partners in an LLC file the same 1065 partnership tax return, as would be done with any conventional business partnership.
Owners of LLCs are considered to be self-employed and must pay a self-employment tax of about 15%, on the total net income of the business.
In C or S corporations, only the salary paid to employees is subject to employment tax. The IRS monitors salaries and will define income as salary if they think a company is not paying adequate salaries. The payroll tax is expensive.
The actual advantages of LLCs over S or C corporations is that they are:
1) Much more flexible in ownership.
2) Simpler to operate.
3) Not subject to as many corporate formalities, or reporting requirements.
4) Owners of an LLC can distribute profits any way they want.
Usually, the state, county, and city require LLCs to pay them the same taxes, fees, and registration fees, as corporations must. Also, many states require LLCs to hire an accountant to prepare the LLC's tax returns.
LLCs no longer save you money. The best reason to choose to form an LLC is the flexibility they offer.
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