We continue our tour of entities with the limited liability company (LLC).

The LLC  is still considered a relatively new business structure, although it’s been around for more than 30 years. The LLC, like a corporation, is a separate legal entity from its owners.  It is formed by filing articles of organization with the Secretary of State.  An operating agreement is recommended, but not required.  So long as it is properly formed, properly capitalized and properly maintained, it should limit the owner’s personal liability for debts and actions of the LLC to the amount invested in the company. LLCs are owned by members and can be managed either by the members or managers.  Neither members nor managers must live in North Carolina. It is

LLCs are desirable because they are flexible as to management participation and allocation of profits and losses, yet they provide limited liability. It is also possible to make an S-election for an LLC so that it is taxed the same way as an S-corporation. This is valuable when the owner wants to treat some profits as dividends to minimize income tax.  LLCs and S-corporations (which we will discuss in detail in another post) are similar in that they both pass-through income directly to the owners, but they have vastly different rules on deductions, salary and self-employment taxes. 

LLCs do require an annual report to be filed with the Secretary of State. 

LLCs are classified as either single-member or multiple-member, and the designation has a big impact on how taxes are reported. Single-member LLCs owned by an individual report all income and expenses on a schedule to Form 1040. Multiple-member LLCs report all income and expenses on a partnership tax return Form 1065.  LLCs are responsible for all employment-related taxes and must issue W-2s and 1099s as required. Members of the LLC are subject to self-employment taxes on all earnings or shares of the profits.

Tags: Choice of Entity, LLC, partnership, S-corp, Taxation

This entry was posted on Tuesday, October 20th, 2009 at 8:25 am and is filed under IRS, LLC, business law, corporation, entity selection, formation, incorporation, small business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.