A limited liability company (LLC) is a business structure designed to provide the limited liability features of a corporation along with the tax and operational flexibility of a sole-proprietorship or partnership. As a pass-through entity (unless it chooses tax treatment as a corporation), an LLC’s profits and losses pass through to its Members (owners). Each individual Member then reports the profits and losses on his or her federal tax return and avoids the double taxation that a corporate shareholder typically faces.
The following summarizes four of the most significant features of an LLC:
- Limited liability for owners: liability protection similar to a corporation and greater than that afforded to a sole proprietorship or partnership
- Pass-through tax treatment for the owners avoiding double taxation
- Ease of operation: LLCs have fewer filing requirements and are easier to set up and maintain than a corporation
- Profit-sharing flexibility: profits and losses may be distributed as members see fit pursuant to their operating agreement.
The best of both worlds? The IRS does not recognize the LLC as a separate taxpayer for federal tax purposes. An LLC may elect to be treated as a corporation by filing Form 8832, and then, once it has elected to be taxed as a corporation, may elect tax treatment as an S corporation by filing Form 2553.
Joe received his law degree from the University of North Carolina–Chapel Hill School of Law and his Accounting degree from the University of Rhode Island. He is admitted to practice law in Connecticut, Massachusetts, and Rhode Island, and he is a CPA. He is an Adjunct Professor and lecturer at the University level and has been a frequent speaker on business planning and legal matters.