What is an LLC or limited liability company?
A limited liability company is a legal form of business company offering limited liability to its owners. It is similar to a corporation, and is a more flexible form of ownership, especially suitable for smaller companies. LLCs were first enacted by the state of Wyoming but can now be created in any U.S. state.
A limited liability company with multiple members is typically treated as a partnership for tax purposes, thereby avoiding double taxation. LLCs are organized with a document most commonly called the "articles of organization". Additionally, it is common to have an "operating agreement" privately specified by the members.
Operating as an LLC form of partnership does not mean that appropriate federal partnership tax forms are not necessary. As a partnership, the entity's income and deductions attributed to each member are reported on that owner's tax return.
Advantages
- Can be set up with just one person.
- No requirement of an annual meeting for shareholders.
- Much less administrative paperwork and recordkeeping.
- Pass-through taxation (i.e., no double taxation), unless the LLC elects to be taxed as a corporation.
- Limited liability, meaning that the owners of the LLC, called "members," are protected from liability for acts and debts of the LLC.
- Using default tax classification, profits are taxed personally at the member level, not at the LLC level.
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