Limited Liability Company FAQs
- What is a Limited Liability Company (“LLC”)?
A limited liability company, or LLC, is a form of business organization providing limited liability for an unlimited number of owners. Limited liability means that owners are, generally speaking, only liable to the extent of their investment in a properly structured and managed LLC. Their personal assets should be protected from a judgment or other action against the business.
- What is the biggest benefit of forming an LLC?
The LLC is an attractive option because it combines the pass-through taxation of a partnership or sole proprietorship with the limited liability protection offered by a corporation.
- What is the biggest disadvantage of forming an LLC?
Due to its pass-through profit designation, all income attributable to the individual members according to their membership interests is treated as member income, irrespective of any actual distributions. Therefore, a member could be taxed on company profits even though those profits were not distributed to the member.
- How does the “pass through” taxation work with an LLC?
For federal income tax purposes the profits of an LLC (Limited Liability Company) “pass through” to the personal income of the members/owners. In the case of a single member LLC it is taxed the same as a sole proprietorship (i.e. typically filed on the schedule C of the owner’s personal income tax filing). In the case of a multi-member LLC, it is taxed the same as a partnership (i.e. a 1065 partnership return is filed with the IRS, with a schedule K-1 being supplied to each partner/member showing the proportional profit/loss allocated to them, with this being filed on the schedule C or E).
- What IRS forms does a single-member or co-owned LLC file?
Single-Member: A single member LLC is considered a “disregarded entity” by the IRS. So, unless they elect otherwise, the single member of an LLC reports their share of company profit and loss on Schedule C of their personal tax return (usually Form 1040).
Co-owned: Unless members elect otherwise, a co-owned LLC is considered a partnership. Though the LLC itself does not pay taxes to the Internal Revenue Service, it files Form 1065, U.S. Partnership Return of Income, and issues each member a Schedule K-1 reporting their share of profit and loss. Members file their personal tax returns (usually Form 1040) and report their LLC distributions on Schedule E.
- What is the Management Structure of an LLC?
An LLC is typically managed by its members/owners (referred to as member-managed). In that respect an LLC is unlike a corporation, which has a much more rigid and defined management structure, including directors and officers. All owners of the LLC are typically referred to as members, and they can have control and voting interest proportional to their ownership interest, or in proportions different from their ownership interest. It is possible, however, to elect your LLC to be manager-managed, rather than member-managed. If so, then members will not have management authority simply by virtue of their status as members in the company; instead, those individuals or entities designated as “managers” will have that authority. But, members will still retain such decision-making authority and power as provided by law or agreed in the LLC’s operating agreement.
- What events could cause my LLC to fall into bad standing?
If an LLC fails to meet its annual state requirements like filing an annual report, paying franchise taxes or maintaining a Registered Agent, the Secretary of State may administratively dissolve the company. Depending upon the state, this status may go by other names like void, involuntarily dissolved or forfeited. When evaluating whether a corporate veil should be pierced, courts may also consider factors like whether LLC owners have properly maintained business records and refrained from co-mingling business and personal assets. For more information, please refer to our informational sheet, “Maintaining Your Limited Liability Protection,” and consult your attorney.
- Should my LLC elect corporate taxation?
At times, S corporation tax treatment can provide a way to take some money out of your business without paying employment taxes. This is because you do not have to pay employment tax on distributions (dividends) from your S corporation—that is, on earnings and profits that pass through the corporation to you as an owner, not as an employee in compensation for your services. The larger your distribution, the less employment tax you’ll pay. So the answer to this question depends on your tax strategy.
- Which entity has more restrictions regarding owners – an LLC or an S Corp?
There is no limit to the number of members who may own an LLC. Subchapter S corporations are limited to a total of 100 shareholders. Also, members of an LLC do not need to be U.S. citizens or residents like with a Subchapter S corporation. Additionally, all shareholders in a Subchapter S corporation must be individuals, so another entity may not own a Subchapter S corporation. Which entity is right for you depends on your particular circumstances, including business and ownership goals and tax needs.