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Limited Liability Company

A Limited Liability Company is a formal organizational business structure that establishes a separate legal entity from its members. Several states permit single-member LLCs, while others require at least two or more members. If an LLC only has one member, it is typically taxed as a corporation or disregarded entity whereas an LLC with more than one member is typically taxed as a partnership.

LLCs are organized by Articles of Organization and often have an Operating Agreement in which the members of an LLC define the operation, management, membership, and income distribution of the company. Since an LLC is recognized as a separate legal entity, liability protection is provided for both the LLC members and the LLC itself. LLCs also have much flexibility when it comes to taxation options.

Advantages of a Limited Liability Company

  • An LLC is a separate legal entity
  • Unlimited number of LLC members allowed
  • LLCs may own property and sue/be sued
  • Limited Liability Protection for all members
  • Flexible organizational rules
  • Corporations allowed as LLC members
  • No Board of Directors or Officers required
  • Tax benefits

The primary advantage for an LLC is that it establishes a separate legal entity from that of the unlimited number of members. As a result, an LLC may own property and sue/be sued in a legal arena. However, one of the key benefits of separate legal status is the limited liability protection it provides. First, members of the LLC are protected from claims against the LLC. The legal provisions of an LLC provide a certain degree of protection for the personal assets of the members against seizure resulting from litigation against the LLC. For example, if an LLC is sued and a judgment is awarded, the personal assets (including checking/savings accounts, automobiles, and even homes) of the members are protected. Likewise, the status of separate legal entity of an LLC protects the assets of the LLC from claims against one of the members. For example, if one of the members in an LLC is sued and a judgment is awarded, the collective assets of the LLC are protected. Furthermore, since corporations are allowed to be a member of an LLC, this further level of tiered ownership increases the degree of liability protection afforded the owner. This is only one of the flexible organizational provisions of an LLC. Another is the lack of requirement for a Board of Directors or Officers, which allows for a more dynamic, responsive operating structure. Depending its structure, the responsibilities of the members of the LLC can be completely dictated by an operating agreement, with no special need for annual meetings, special notations, or record keeping. In addition, LLCs and LLC members alike enjoy many tax benefits. The LLC itself is eligible for check-the-box taxation declaration whereby an LLC can elect to be taxed as a sole proprietor, partnership, S corporation or C corporation, providing much flexibility. LLC members also benefit from pass-through taxation, whereby income is claimed only at the individual level, with no double business income tax. Even if there is no actual distribution, the profits and losses of an LLC are reported directly on the members’ individual tax returns (IRS Form 1040). After filing a U.S. Return of Partnership Income (IRS Form 1065), the LLC declares each member’s taxable profit on a Partner’s Share of Income, Deductions, Credits, Etc. (IRS Schedule K-1).