Combining the best aspects of Partnerships and Corporations.
A
Limited Liability Company, or LLC, is not a corporation, although it
offers many of the same advantages. An LLC is best described as a
combination of a corporation and a partnership. LLCs offer the limited
liability of a corporation, while allowing more flexibility in managing
the business and organization.
An LLC
does not pay any income tax itself. It's a "flow through" entity that
allows profits and losses to flow through to the tax returns of the
individual members. Avoiding the double taxation of C-Corporations.
While
setting up an LLC can be more difficult than creating a partnership (or
sole proprietorship), running one is significantly easier than running a
corporation. Here are the main features of an LLC:
Limited Personal Liability
Like
shareholders of a corporation, all LLC owners are protected from
personal liability for business debts and claims. This means that if the
business itself can't pay a creditor -- such as a supplier, a lender,
or a landlord -- the creditor cannot legally come after any LLC member's
house, car, or other personal possessions. Because only LLC assets are
used to pay off business debts, LLC owners stand to lose only the money
that they've invested in the LLC. This feature is often called "limited
liability."
While LLC owners enjoy
limited personal liability for many of their business transactions, it
is important to realize that this protection is not absolute. See Exceptions to Limited Liability.
LLC Taxes
Unlike
a corporation, an LLC is not considered separate from its owners for
tax purposes. Instead, it is what the IRS calls a "pass-through entity,"
like a partnership or sole proprietorship. This means that business
income passes through the business to the LLC members, who report their
share of profits -- or losses -- on their individual income tax returns.
Each LLC member must make quarterly estimated tax payments to the IRS.
While
an LLC itself doesn't pay taxes, co-owned LLCs must file Form 1065, an
informational return, with the IRS each year. This form, the same one
that a partnership files, sets out each LLC member's share of the LLC's
profits (or losses), which the IRS reviews to make sure the LLC members
are correctly reporting their income.
LLC Management
The
owners of most small LLCs participate equally in the management of
their business. This arrangement is called "member management."
The
alternative management structure -- somewhat awkwardly called "manager
management" -- means that you designate one or more owners (or even an
outsider) to take responsibility for managing the LLC. The non-managing
owners (sometimes family members who have invested in the company)
simply sit back and share in LLC profits. In a manager-managed LLC, only
the named managers get to vote on management decisions and act as
agents of the LLC.
Friday, February 12, 2016
