The business structure know as a limited liability company, or LLC, can be best described as being a composition of a partnership and a corporation. Simply explained, an LLC gives you the good parts of a corporation without all of the formalities usually associated with a corporation.

The owners of an LLC, who are called member, are treated like a partnership when it comes to taxes. The LLC passes through income taxes directly to its owners, so the LLC never pays income taxes itself, unlike a corporation.

An LLC never worries about the double-taxation problem that a corporation does. In other words, because the tax liability is passed on directly to the owners, income tax is paid just one time. However, a limited liability company is still obligated to pay state (if applicable) and federal payroll taxes.

At the time of forming an LLC, you choose how to handle income taxes. You can handle income taxes as if you were a sole proprietor, a C corporation, or an S corporation. The great thing about a limited liability company is that you get to decide how to handle paying taxes.

Assuming that the LLC is properly set up, and you completely separate business and personal activities, the members can look forward to certain personal liability protection. This potential protection is a big reason why people choose to form an LLC versus operating as a sole proprietor. Also, a business earns more admiration when it has a formal structure, such as an LLC.

LLC incorporation is done by a person who does not necessarily have to be a member. There are actually several very good online companies that will create your LLC for a very reasonable cost, which means you are assured that the structure is properly set up.

Typically, a member’s monetary liability is limited to the financial contribution made by that member. When you are operating as a limited liability company, you can bring in more than one partners, who can be active in the business, or serve as silent investors.

While a limited liability company is similar in structure to a corporation, it offers member more flexibility. Starting an LLC works best smaller companies in which the number of owners is limited.

The limited liability company is a relatively new form of business structure, at least in the United States. As early as 1986, you could create a limited liability company in only two states. Today, you can form an LLC in every state.

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