A Limited Liability Company (LLC) is owned by an unlimited number of members that are similar to shareholders in a corporation. All profits and losses of the LLC pass directly to the members, and each member is taxed at its own personal tax rates. Management of the business may fall to all members or it may be delegated to a few members or to a single manager.

LLC status may be appropriate when the business is a partnership or when investment real estate is owned. It offers the owner complete protection from personal liability. This structure is available only to privately held companies; it is not suitable for any enterprise that may go public in the future. And there may be circumstances in which pass-through tax treatment may be lost. Some states also impose income or franchise taxes on LLCs.

Advantages

An LLC is a cross between a partnership and a corporation, which offers several advantages. They offer flexibility without the restrictions associated with an S Corporation. All members of an LLC enjoy limited liability, including those who participate in management. And because all profits and losses of the LLC pass through to the members, double taxation of profits is avoided. In addition, LLCs are usually free to use any organizational structure that is agreed upon by its members.

Disadvantages

In most cases, an LLC must have at least two members, and more documentation is required than in other types of partnerships. Members report their earnings or losses on Schedule C of their federal income tax returns, and earnings are usually subject to the self-employment tax. LLC statutes also vary from state to state, so operating in multiple states can become complex. Some states limit the life of a Limited Liability Company.