A limited liability company (LLC) is the United States-specific form of a private limited company. It is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is not a corporation in itself; it is a legal form of a company that provides limited liability to its owners in many jurisdictions.
A Limited Liability Company (LLC) is a hybrid legal entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC is a type of unincorporated association distinct from a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary
characteristic it shares with a partnership is the availability of pass-through income taxation. It is often
more flexible than a corporation, and it is well-suited for companies with a single owner.
Although LLCs and corporations both possess some analogous features, the basic terminology
commonly associated with each type of legal entity, at least within the United States, is sometimes
different.
When an LLC is formed, it is said to be "organized", not "incorporated" or "charted", and its
founding document is likewise known as its "articles of organization", instead of its "articles of
incorporation" or its "corporate charter". Internal operations of an LLC are further governed by its "operating agreement", rather than its "bylaws". The owner of beneficial rights in an LLC is known as a "member," rather than a "shareholder". Additionally, ownership in an
LLC is represented by a "membership interest" or an "LLC interest" (sometimes measured in "membership units" or just "units" and at other times simply stated only as percentages), rather than represented by "shares of stock" or just "shares" (with ownership measured by the number of shares held by each shareholder). Similarly, when issued in physical rather than electronic form, a document evidencing ownership rights in an LLC is called a "membership certificate" rather than a "stock certificate".
In the absence of express statutory guidance, most American courts have held that LLC members are subject to the same common law alter ego piercing theories as corporate shareholders. However, it is more difficult to pierce the LLC veil because LLCs do not have many formalities to maintain. As long as the LLC and the members do not commingle funds, it is difficult to pierce the LLC veil. Membership interests in LLCs and partnership interests are also afforded a significant level of protection through the charging order mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor's share of distributions, without conferring on the creditor any voting or management rights.
Limited liability company members may, in certain circumstances, also incur a personal liability in cases where distributions to members render the LLC insolvent
LLCs are subject to fewer regulations than traditional corporations, and thus may allow members to create a more flexible management structure than is possible with other corporate forms. As long as it remains within the confines of state law, the operating agreement is responsible for the flexibility the members of the LLC have in deciding how their LLC will be governed. State statutes typically provide automatic or "default" rules for how an LLC will be governed unless the operating
agreement provides otherwise.
The limited liability company ("LLC") has grown to become one of the most prevalent business forms in the United States. However, the use of a single member LLC may do little to protect the assets of the
member, as compared to operating as an unincorporated entity.
Effective August 1, 2013, the Delaware Limited Liability Company Act provides that the managers and
controlling members of a limited liability company owe fiduciary duties of care and loyalty to the
limited liability company and its members. Under the amendment (prompted by the Delaware
Supreme Court's decision in Gatz Properties, LLC v. Auriga Capital Corp) parties to an LLC remain
free to expand, restrict, or eliminate fiduciary duties in their LLC agreements (subject to the implied covenant of good faith and fair dealing).
For U.S. federal income tax purposes, an LLC is treated by default as a pass-through entity. If there is only one member in the company, the LLC is treated as a “disregarded entity” for tax purposes, and an individual owner would report the LLC's income or loss on Schedule C of his or her individual tax return. Thus, income from the LLC is taxed at the individual tax rates. The default tax status for LLCs with multiple members is as a partnership, which is required to report income and loss on IRS Form 1065. Under partnership tax treatment, each member of the LLC, as is the case for all partners of a partnership, annually receives a Form K-1 reporting the member's distributive share of the LLC's income or loss that is then reported on the member's individual income tax return. On the other hand, income from corporations is taxed twice, once at the corporate entity level and again when
distributed to shareholders, thus more tax savings often result if a business formed as an LLC rather
than a corporation.
An LLC with either single or multiple members may elect to be taxed as a corporation through the filing
of IRS Form 8832. After electing corporate tax status, an LLC may further elect to be treated as a
regular C corporation (taxation of the entity's income prior to any dividends or distributions to the
members and then taxation of the dividends or distributions once received as income by the members)
or as an S corporation (entity level income and loss passes through to the members). You may consider an LLC taxed as a S-corporation as the best possible small business structure. It combines the simplicity and flexibility of an LLC with the tax benefits of an S-corporation (self-employment tax savings)
Reserved for publicly traded companies and have strict formalities. A C corporation, under United States federal income tax law, refers to any corporation that is taxed separately from its owners. A C corporation is distinguished from an S corporation, which generally is not taxed separately. Most major companies are treated as C corporations for U.S. federal income tax purposes.
An S corporation, for United States federal income tax purposes, is a closely held corporation (or, in some cases, a limited liability company (LLC) or a partnership) that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S corporations do not pay any income taxes.
A limited liability company (LLC) is the United States-specific form of a private limited company. It is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is not a corporation in itself; it is a legal form of a company that provides limited liability to its owners in many jurisdictions.
Reserved for publicly traded companies and have strict formalities.
A C corporation, under United States federal income tax law, refers to any corporation that is taxed separately from its owners. A C corporation is distinguished from an S corporation, which generally is not taxed separately. Most major companies are treated as C corporations for U.S. federal income tax purposes.
Corporations are required to issue financial statements in the United States. Financial statements
may be presented on any comprehensive basis, including an income tax basis. There is no requirement
for appointment of auditors, unless the corporation is publicly traded and thus subject to the
requirements of the Sarbanes–Oxley Act.
Any distribution from the earnings and profits of a C corporation is treated as a dividend for U.S. income
tax purposes. "Earnings and profits" is a tax law concept similar to the financial accounting
concept of retained earnings. Exceptions apply to treat certain distributions as made in exchange for stock rather than as dividends. Such exceptions include distributions in complete termination of a shareholder's interest and distributions in liquidation of the corporation
An S corporation, for United States federal income tax purposes, is a closely held corporation (or, in some cases, a limited liability company (LLC) or a partnership) that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S corporations do not pay any income taxes. Instead, the corporation's income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own
individual income tax returns.
The term "S corporation" means a "small business corporation" which has made an election u to be
taxed as an S corporation. A corporation is "eligible" if it:
• Has no more than 100 shareholders,
• Has shareholders who are all individuals (exceptions are made for various tax exempt organizations,
estates, and trusts)
• Has no nonresident aliens as shareholders, and
• Has only one class of stock.
Employee salaries are subject to FICA tax (Social Security & Medicare tax) --currently 15.3 percent--(6.2% Social Security paid by the employee; 6.2% Social Security paid by the employer; 1.45% employee medicare and 1.45% employer medicare). The distribution of the additional profits from the S corporation will be done without any further FICA tax liability.If for some reason, Bob (as the majority owner) were to decide not to distribute the money, both Bob and John would still owe taxes on their pro-rata allocation of business income, even though neither received any cash distribution. To avoid this "phantom income" scenario, S corporations commonly use shareholder agreements that stipulate at least enough distribution must be made for shareholders to pay the taxes on their distributive shares.Quarterly estimated taxes must be paid by the individual to avoid tax penalties, even if this income is "phantom income"
