Definition of LLC





Definition of LLC

Definition of LLC - LLC - An LLC is not a separate tax entity like a corporation; it is what the IRS calls a pass through entity, like a partnership or sole proprietorship. All of the profits and losses of the LLC pass through the business to the LLC owners , who report this information on their personal tax returns. The LLC itself does not pay federal income taxes, but some states do charge the LLC itself a tax. Use the links on this page and take advantage of the LLCs and S Corporations that will be most beneficial to your business.

Definition of LLC and Income Taxes: The IRS treats your LLC like a sole proprietorship or a partnership, depending on the number of members in your LLC. If you've already done business as a sole proprietorship or partnership, you are aware, because you know many of the basic rules.

The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.




Advantages and Disadvantages of LLC

Advantages of LLC
  • Limited Liability: Owners of a LLC have the limited liability protection of a corporation.


  • Flexible Profit Distribution: Limited liability companies can select varying forms of distribution of profits. Unlike a common partnership where the split is 50-50, LLC have much more flexibility.


  • No Minutes: Corporations are required to keep formal minutes, have meetings, and record resolutions. The LLC business structure requires no corporate minutes or resolutions and is easier to operate.


  • Flow Through Taxation: All your business losses, profits, and expenses flow through the company to the individual members. You avoid the double taxation of paying corporate tax and individual tax. Usually, this will be a tax advantage, but circumstances can favor a corporate tax structure.



Disadvantages of LLC
  • Limited Life: Corporations can live forever, whereas a LLC is dissolved when a member dies or undergoes bankruptcy.


  • Going Public: Business owners with plans to take their company public, or issuing employee shares in the future, may be best served by choosing a corporate business structure.


  • Added Complexity: Running a sole-proprietorship or partnership will have less paperwork and complexity. A LLC may federally be classified as a sole-proprietorship, partnership, or corporation for tax purposes. Classification can be selected or a default may apply.



Definition of LLC