What is a Limited Liability Corporation?

A limited liability company or LLC is an organization owned by one or more individuals or corporations. The members own membership interests in the company and not shares. LLC is a recently developed type of legal entity. For many entrepreneurs, it is the ideal choice, as it has the tax advantages of the limited partnership and the finite liability element of corporations.

The LLC is a separate legal entity, and liabilities do not pass on to the members. The management and organization of the LLC are flexible and governed by the Membership Agreement. Owners may manage the LLC, where all owners vote on all issues, or managers may achieve it. The owners elect one or more managers, much like a board of directors. These managers handle the business, freeing the owners from voting on every operational detail. The IRS does not recognize the LLC as a separate category. A single-member LLC has to file as a sole proprietorship while the multi-member LLC may choose to be taxed as corporations or partnerships.

The reason for the popularity of the LLC is that it caters to the demands of the accountants and attorneys. The LLC is a pass-through entity. This means that there is no double taxation, as with corporations. Accountants tend to prefer the LLC because they are worried about the dangers of double taxation if their clients form a corporation. Corporations have to pay taxes on their income. Their shareholders have to pay taxes on the same income when they are taxed on the dividends. In the LLC, each partner or member’s contribution to the net profit or loss for the year passes through to the individual taxpayer’s 1040 personal tax return. The LLC is not subject to any tax. Attorneys generally prefer LLCs as they offer more excellent asset protection to the members.

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