What is a LLC?
The limited liability company (LLC) is a business form that acts as a hybrid business entity, sharing some of the most favorable characteristics of other business forms. Benefits of a LLC include providing the pass-through taxation of a sole proprietorship or partnership while offering the limited liability of a corporation.
LLC is becoming increasingly popular in the United Sates as it often seen as the least complex business model. The LLC has something to offer all styles of business, but proved especially advantageous to companies with a single owner, since it provides the best of both worlds for business operators who want the benefits of corporations without having to file as one.
LLC is Flexible
The LLC enjoys a greater amount of flexibility than the other models of business, and needs less administrative paperwork and bookkeeping than a standard corporation. This LLC flexibility includes how the members of a LLC can, to an extent, decide how their LLC may be governed. The phrase, “unless otherwise provided for in the operating agreement” is found in all LLC statutes.
A LLC’s flexibility extends also to its ability to choose its tax regime. A LLC may opt to be taxed as a sole proprietorship, partnership, S corporation, C corporation—as long as nothing else inhibits a LLC from qualifying for these tax treatments.
A LLCs ability to select its preferred tax regime allows LLC business members perks that are not offered for corporation models. While a standard S Corporation in the United States must have a limited amount of stockholders (all of whom must be US citizens), the LLC is allowed an unlimited amount of members, without any requirement of citizenship.
Pass-Through Income Taxation for LLC
Instead of filing a corporate tax return, LLC owners need only report their own share of the profit or loss. If the limited liability company has only one member, then the LLC is treated as a “disregarded entity” for tax purposes. Then, that sole member can report the LLCs income or loss on Schedule C of that member’s own tax return—so LLC income is instead taxed at the individual tax rate.
When a LLC operates with multiple members, the default tax status is that of a partnership. This requires LLCs to report income or loss on IRS form 1065. With this partnership tax treatment, all members of the LLC will receive a K-1 Form annually, reporting each member’s distributive share of the income or loss and is then to be reported on each unique member’s own tax return.
This tax model allows LLCs the advantage of more tax savings, since they can avoid the double taxation required of corporations, who are taxed once at the corporate entity level, and again when distributed to shareholders.
The “limited liability” of a limited liability company provides business members with an increased amount of legal protection, similar to that of a corporation. In this business form, LLC owners are protected from a significant amount of the liability from the debts and actions of the company. The amount of protection will vary by each State’s shield laws in place.
Additionally, in the case of real estate companies, all individual properties may be owned by individual LLCs, which in turn shields not only LLC members, but also all their individual properties from cross-liability.
So you again can as the question What is an LLC and now you have a full understanding of how it can help you with protection and tax credits. If you would like to get started in setting up a LLC please contact one of our incorporation specialists to help you.