What is an LLC? LLC is the abbreviation for a Limited Liability Company. It is company that has many desirable features and a mix of features from corporations and partnerships. Many small businesses are choosing LLC’s over corporations and partnerships. The Limited Liability Company is similar to a corporation in that it is a legal entity that is separate from the owners who are referred to as “members” or “owners”.

Both a corporation and an LLC carry warnings of “limited liability”. In fact, this is the main reason many partnerships are restructuring as LLC’s. In an LLC, the owners personal assets are protected and they are only personally liable for his or her own negligence and not negligence of other owners. In a partnership, all partners are personally and fully liable for the actions of the other partners.

There are tax benefits to a LLC as well. The company itself pays no taxes. The profits are taxed to the members at their regular tax rate. For Federal Taxes, an LLC of 2 members or more is considered a partnership, and a one person LLC is considered a Sole Proprietorship. The members pay taxes on the profit whether distributed to them or not. With an LLC, the owners are not employees of the company and members of the LLC are subject to self-employment tax like partnerships and sole proprietors. There are exemptions to self-employment tax, such as if an owner works less than 501 hours per year. There are other exemptions and one should keep in mind that the laws are ever-changing and should you decide to set up an LLC, you should consult with a tax advisor to see if the self-employment tax would apply to you.

An LLC can decide to changes its tax status to be a regular corporation but this can be time consuming and expensive so you should make sure prior to setting up your company. Many states restrict transferability of ownership of LLCs. Individual states have different ways of taxing LLCs. Some states tax LLC as the IRS does as partnerships. Some states tax LLCs as corporations. Before you set up you should find out how your state taxes a LLC.

To become a LLC, you will have to register with your state’s Secretary of State. You will have to have “Articles of Organization” which are similar to “Articles of Incorporation”. Some states require you to have an operating agreement which is similar to a partnership agreement or corporate bylaws. This is the most important document an LLC has. It will contain everything about the LLC, how it will be managed, how money will be paid out, who can be members, etc. You can set up your own rules for the LLC. If you do not set up this agreement, you will be bound to your states default rules.

Make sure if you set up a LLC, that you include the LLC as part of your business name on all your checks, stationery, contracts, business cards, etc. because you will need to make it clear to everyone that you do business with that you are not acting as an individual but rather representing a “Limited Liability Company”.

This entry was posted on Tuesday, February 3rd, 2009 @ 12:24 pm on the category Business Structure. You can follow any responses to this entry through the RSS 2.0 You can leave a response, or trackback from your own site.