Limited Liability Company (LLC)
Always seek out information pertaining to your jurisdiction before you make a decision.
In the United States, a Limited Liability Company (LLC) is a popular choice among small-business owners who want limited liability without all the paperwork involved in forming and maintaining a corporation, and without the “double taxation” associated with corporations that pay dividends to their owners.
To form an LLC, you file Articles of Organization with the Secretary of State in the state where you intend to do business. In some states, you must also file an Operating Agreement that outlines how the business will be run and the member’s rights and responsibilities. (The Operating Agreement for an LLC is similar to the Partnership Agreement for a Partnership.)
For more information about how to form an LLC in the United States, contact the applicable Secretary of State.
The owners of an LLC are not shareholders since there are no shares. Instead, they are members of the LLC.
Can I form an LLC without any partners?
In most parts of the United States, you can form an LLC without any partner. There are exceptions though, such as Massachusetts and District of Columbia, where an LLC must have a minimum of two members.
Distribution of profits and losses
With an LLC, profits and losses don’t have to be distributed proportionally. This means that the profit distribution is much more flexible than for a corporation. A-C corporation can only pay out dividends (and each share of the same class must get exactly the same dividend), and an S corporation taxed as a partnership must allocate profits and losses in proportion to shares held.
There is no upper limit for the number of members (shareholder equivalent) that an LLC can have.
An S Corporation can only have a maximum of 100 shareholders. For an LLC, there is no such limitation.
Examples of paperwork that is mandatory for the LLC are the annual report and the quarterly withholding and tax deposit coupons.
Generally speaking, the mandatory administration of an LLC is more complex than for a sole proprietorship but less demanding than for a corporation.
One of the big advantages of choosing to form an LLC instead of a sole proprietorship or general partnership is the protection of your personal assets offered by the LLC. With an LLC, you only risk the money that you paid into the business. Creditors are not allowed to go after your personal assets for debts incurred by the LLC.
Important: To safeguard themselves, some creditors will only give the LLC credit if you personally guarantee the debt. Agreeing to this removes liability protection and the creditor can go after your personal assets for this debt.
You need to file some paperwork with the IRS when you form your LLC. The choice of tax status is filed using IRS Form 8832.
When it comes to taxes, the standard LLC is fairly similar to the sole proprietorship, because profits and losses are “pushed through” and reported on the member’s (owner’s) individual tax return.
If the LLC has more than one member, the LLC can choose to be taxed as a partnership by filing IRS Form 1065.
Having an LLC can be a way of avoiding the dreaded “double taxation” that occurs when a C Corporation pays dividends to its shareholders. (Another option is the S Corporation.)
Important: The exact rules for LLCs will vary from one state to another. Always obtain information pertaining to the right state.
LLC members that fulfill certain requirements must pay self-employment tax, which is a medicare/social security tax paid by the self-employed. This includes members that participate in the business for more than 500 hours during the tax year, members that can sign contracts on behalf of the LLC, and members of any Professional Seriveces LLC.
The self-employment tax for LLC members is calculated based on profits. If you instead had an S corporation, the self-employment tax would be calculated based on salary only.
Can a corporation co-own an LLC?
Yes, the members (shareholder equivalents) of an LLC can be individuals, partnerships and corporations.
Unlike corporations, LLCs do not have perpetual life. Technically, the LLC dissolves when a member quits, retires or dies. It is important to have provisions in place for how to re-establish the business as smoothly as possible when this happens.
In some states, there is a built-in time limit for LLCs. They may, for instance, be required to dissolve after 30 years or 40 years.