What Is An LLC?
LLC stands for “Limited Liability Company.” It one of the most common entity types utilized by businesses due to its flexible business structure and protection of your personal assets.
IRS’ definition of a Limited Liability Company (LLC): A Limited Liability Company (LLC) is a structure allowed by state statute. An LLC is formed by filing articles of organization with the individual state’s secretary of state. Properties of an LLC include:
- Owners of an LLC are called members. Members may include individuals, corporations, other LLCs and foreign entities.
- An LLC can be formed by one or more members. There is no maximum number of members.
- There cannot be more than one active LLC with the same name in the same state.
- For federal tax purposes, an LLC must choose to be treated as a partnership or a corporation, or be disregarded as an entity separate from its owner(s).
Taxation of an LLC:
If only one person is establishing an LLC, then it is called a “Single Member LLC.” Single Member LLCs are taxed as a Sole Proprietor, meaning profits and losses are passed through to the individual’s federal tax return to the IRS on their form 1040.
If there is more than one person as members of the LLC, then it is referred to as a Multi-Member LLC, which by default is taxed as a Partnership, meaning profits and losses are passed through to the individual members’ federal tax returns.
Members of an LLC can also elect to be taxed as a Corporation instead of a Partnership:
- LLCs can elect to be taxed as a C-Corp, meaning profits and losses from the LLC are reported on Tax Form 8832
- LLCs can elect to be taxed as an S-Corp, meaning profits and losses from the LLC are reported on Tax Form 2553
LLCs are also taxed on the state level, with details varying from state to state. For example, in California, there is an annual $800 tax for all LLCs, as well as an income-based annual fee if the LLC earned more than $250,000 in one tax year. The $800 tax for LLCs is a reason why many small businesses may not elect to form an LLC, especially if the benefits of liability protection do not outweigh the cost of the state tax. To find out what state taxes are required of Limited Liability Companies where your business is located, visit the Department of Revenue for your state.
If a husband and wife form an LLC together, in some states (such as California), they can elect to be classified as a Single Member LLC for federal tax purposes.