Limited Liability Company (LLC)

Limited Liability Company (LLC)

A limited liability company (LLC) is a hybrid business entity that has certain characteristics of both a corporation and a partnership / sole proprietorship.


Definition

Main Guide: Starting a Business.

A limited liability company (LLC) is a hybrid business entity that has certain characteristics of both a corporation and a partnership / sole proprietorship. While an LLC is a business entity, it is not incorporated and thus is not a corporation. The primary characteristic that a LLC shares with a corporation is limited liability and the primary characteristic it shares with a partnership is pass-through income taxation. A LLC is often more flexible than a corporation, and is well-suited for businesses with a single owner.


Related Services


Taxes

Main tax guide

A limited liability company has a "pass through" taxation structure. This means that the LLC does not report any taxes to the federal government. Rather, each of the owners report the profits and losses of the LLC on their personal income tax return.


Pros & Cons

Pros:

  • Unlimited number of owners. An LLC allows for an unlimited number of members. However, LLCs with a single owner are taxed as sole proprietorships.
  • Special allocation of profits. LLCs allow for members to split profits and losses in different percentages than their respective percentages of ownership. This means that members can share in profits (and writing off losses) in excess of their individual ownership percentage.
  • Limited Liability. Members are personally protected from any liability of the LLC.
  • Corporate Members. A corporation can be a member of an LLC. This allows you to create an additional level of ownership.
  • Limited Liability. Members are personally protected from any liability of the LLC.

Cons:

  • No Tax Benefits. LLCs do not enjoy the same tax benefits of a corporation.
  • No Stocks. The LLC cannot issue stock.
  • Taxable Income. Each member's pro-rata share of profits represents taxable income. This is regardless of whether or not a member's share of profits is distributed to them.
  • Self-Employment Tax. The managing member's share of bottom-line profit of the LLC is considered earned income, and therefore that same amount is subject to self-employment tax.