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Limited Liability Company (LLC)


  • A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, and you should check with your state if you are interested in starting a Limited Liability Company.
  • LLC is not considered a corporation but a majority of states provide all owners (also known as members) have limited liability and therefore no personal liability.
  • Typically limited liability is retained even if members fail to follow usual formalities in conducting business.
  • LLC is separate legal entity so can sue or be sued in won name
  • LLC is more like a large corporation. There is no limit of the number of members. LLC itself is not taxed; the tax liability flows through the LLC to the individual members.
  • Member(owner) of LLC has no interest in any specific property in LLC but has interest (personal property interest) in LLC in general. The right of a member to profit distribution is agreed upon in the operating agreement.
  • Member has management interest which includes the rights to manage affairs for firm, vote within firm, and get information about LLC. Unless agreed otherwise, each member has equal voice in management.

Formation of LLC

To form LLC, on or more persons may act as organizers by filing a Certificate of Organization with secretary of state

  • May be amended by filing amendment with secretary of state
  • The operating Agreement specifies the manner in which the company will conduct and wind up operations

Classifications

  • Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”).
  • Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation.
  • An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.

Effective Date of Election

  • An LLC that does not want to accept its default federal tax classification, or that wishes to change its classification, uses Form 8832, Entity Classification Election, to elect how it will be classified for federal tax purposes.
  • Generally, an election specifying an LLC’s classification cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. An LLC may be eligible for late election relief in certain circumstances.
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