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What is a Limited Liability Company?

A limited liability company, sometimes called a “pass-through entity”, is the US-friendly version of an individual or business entity. It’s a highly complex business structure which combines the taxation advantages of both a business corporation and the pass-through tax of a sole proprietorship or partnership. Basically, the owner of the LLC owns a liability. His liability is protected by his company’s liability insurance. The owner or owners of LLCs are called partners in their LLCs.

LLCs are registered as legal entities separately and as one entity with their state government. As a legal entity, it has all the rights, privileges, powers, and immunities of any other legal entity. The owners of an LLC are not “called” partners in their LLCs. Rather, they are considered legally separate owners. The partnership, or sole proprietor, owns the partnership interest in its entirety. Then there’s the liability.

Limited liability corporations are taxed like corporations. The only real difference is that corporations are “actively” operated while LLCs are “in the nature of” corporations. A LLC does not have to file reports with the IRS. Nor are meetings held quarterly or annual, unless the state has specific rules about the reporting requirements.

As for the income tax purposes of an LLC, let me tell you.. The liability is just that. It limits what you owe to the IRS. The company’s assets are protected. But there is one more important thing. Your personal liability to the IRS, your own personal taxes (if any) are never capped.

Limited Liability Corporations and Limited Liability Partnerships have different tax implications. Business owners can minimize their tax liability by structuring their businesses in a manner that will allow them to benefit both from the liability protection provided and the tax credits received. Many businesses use an C-corporation structure as their exclusive domicile. Some choose to structure their LLCs as pass-through entities…that is, they are a separate legal entity from their parent company.

When you create a partnership, you are taxed as a C corporation. When you create an LLC, you are treated as a C-corporation. (A pass-through entity must register as a pass-through entity.) However, neither entity is required to register as a corporation nor is it required to report its shareholders as individuals on its income tax returns. Nor is there any requirement that the company maintain an operating agreement.

But all of this may not be helpful to the new business owner looking for a limited liability entity. The operating agreement for most limited liability companies is quite long. It may cover such matters as management, operations, and shareholders. You also have the choice of selecting an operating agreement from the list provided by the corporate law firm that you hired. Unfortunately, not every state’s laws on operating agreements are uniform. So the choice of an operating agreement depends on where your business will be incorporated.

Limited liability corporations are, in many respects, the ideal business entity for small entrepreneurs. The benefits they provide owners make up for their somewhat higher initial costs. And with a limited liability corporation, double taxation does not apply. Hopefully, we will see more progress in this area in the future.

The advantages of a limited liability companies over other corporate structures are particularly apparent when the company decides to establish a facility or engages in manufacturing. When the company is sued by another party, it does not have to worry about paying damages. The damages can be paid by the profits of the company under the operating agreement. This means the owner of the company is not personally liable for the actions of his business partners.

But limited liability companies do have some drawbacks. In some states, double taxation can apply to the corporation’s owners if they take part in corporate transactions with their partners. This means that such transactions can trigger flow-through taxation on the owners of the corporation who have not been named as owners in their own corporations.

In the end, what is a limited liability company? As a business owner, you should be able to answer this question with a clear understanding of the basics of the corporation and limited liability companies. By taking part in meetings where these issues are discussed, you can learn about the different operating agreements and the pros and cons of each option.

What is a Limited Liability Company?

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