A limited liability company (LLC) is a business structure in the U.S. that offers protective measures for its owners’ personal assets against lawsuits and creditors concerning the company’s business debts. This hybrid entity combines the liability protection of a corporation with the flexibility of a partnership or sole proprietorship.
Key Takeaways
- The limited liability company (LLC) protect its owners from being personally liable for the company’s debts or liabilities.
- Regulation of LLCs varies by state.
- Anyone can be a member of an LLC, excluding banks and insurance companies.
- LLCs do not pay taxes on their profits at the entity level.
- Profits and losses are passed through to members to report on their personal tax returns.
Understanding a Limited Liability Company (LLC)
LLCs are sanctioned under state statutes, with varying regulations from state to state. Generally, LLC members can include individuals, corporations, foreigners, foreign entities, and even other LLCs. However, banks and insurance companies can’t form LLCs.
Forming an LLC involves filing articles of organization with the state, making the process simpler than setting up a corporation. Nonetheless, an LLC provides comparable flexibility and protection for its investors.
Typically, LLCs report profits and losses on their members’ personal tax returns due to pass-through taxation. However, they can opt to be taxed as a corporation for federal tax purposes.
In cases of fraud or failure to meet legal standards, creditors might pursue the members’ personal assets. Note that LLCs differ from Unlimited Liability Corporations (ULC), particularly allowed in some countries and Canadian provinces. LLC member wages are termed operating expenses, deducted from revenue.
Forming an LLC: Step-by-Step
- Choosing a Name: The first task is to select a unique name for the LLC.
- File Articles of Organization: Complete and file this document, including member names and addresses, and designate a registered agent to handle legal matters.
- Obtain an EIN: File paperwork at a federal level to get an employer identification number (EIN).
- Draft an Operating Agreement: Specify operational and financial decision-making roles of members and lay out profit distribution guidelines.
- Registered Agent Services: Hire a registered agent for handling legal and government correspondence.
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Related Terms: Corporation, Partnership, Sole Proprietorship, Pass-through Taxation, Business Structure.
References
- Internal Revenue Service. “Limited Liability Company (LLC)”.
- Internal Revenue Service. “Taxation of Limited Liability Companies”, Page 2.
- Nolo. “When You Might Be Personally Liable for LLC or Corporate Debt”.
- Internal Revenue Service. “Apply for an Employer Identification Number (EIN) Online”.
- Internal Revenue Service. “LLC Filing as a Corporation or Partnership”.
- Upcounsel. “Well Known LLC Companies: Everything You Need to Know”.
- Internal Revenue Service. “Forming a Corporation”.
