If you are a small business owner, the Limited Liability Company, or LLC, is one among several forms of ownership available for you to choose from. The LLC can be a viable option for both sole proprietorships and businesses with multiple owners, and it combines certain features of a partnership with certain features of a corporation into a business form that offers flexibility and protection to its owners.
An LLC is a little more formal than a partnership or a sole proprietorship in that it is formed by filing Articles of Organization with the Secretary of State. The owners of an LLC are its “members” and not shareholders. And, unlike a corporation, an LLC has no bylaws. Instead, multiple member LLCs operate according to an Operating Agreement.
As long as the LLC is operated appropriately, its members are afforded limited personal liability for its debts and obligations, similar to the limited liability granted to corporate shareholders. Unlike a “C” corporation, however, the members of a Limited Liability Company enjoy pass-through taxation. This means that the LLC itself is not taxed; instead, the members themselves are taxed on earnings received from the organization. In short, this means no double taxation.
Although it offers flexibility and the benefit of pass-through taxation, there are some disadvantages that come with Limited Liability Company status. For instance, in many cases, members’ earnings are subject to self-employment tax.
The form of ownership you select for your business can have far-reaching ramifications. It’s important that you consult with an experienced advisor and understand all your options before making a selection.
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