What Are Limited Liability Companies (LLC)?

A Limited Liability Company (LLC) is an entity formed under your state's law, and which has limited liability protection similar to a corporation.

However, an LLC is not a corporation, nor is it considered a distinct entity for purposes of federal income taxes. Depending on the ownership and state of origin, it ELECTS to be treated as another type of entity for purposes of federal income tax filings.

In most states, an LLC that is made up of TWO or more owners (called "members" under most states' laws) elects to be taxed as EITHER a corporation (filing Form 1120, and following all rules that would be followed as a regular corporation) OR a partnership (filing Form 1065, and treating the members who participate in the business as if they were general partners of the partnership.)

An LLC that is owned by ONE person, in most states, can either elect to be treated as a corporation (filing Form 1120, and following all rules that would apply to a corporation) OR as a "disregarded entity" for tax' purposes. The concept of "disregarded entity" simply means that the owner of the LLC is taxed as if no LLC existed. For an individual, that means the business activity would be filed on Form 1040, Schedule C, and all rules applicable to self-employment would apply.

LLCs are still pretty much the "new kid on the block" in tax law, and there isn't very much in the way of case law on how to handle unusual situations. The laws governing LLCs vary from state to state; some states may limit the types of activities that may be conducted within an LLC, and not all states will recognize a "foreign" (from another state) LLC. It would be wise to seek out professional guidance before forming an LLC, especially if you are contemplating this type of entity for an activity that is complex or will be doing business in more than one state.

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