Limited Liability Company (not Limited Liability Corporation)
The entity of choice for a growing number of businesses, including individuals. A creature of state statute, the LLC provides a vehicle through which an unlimited number of people can actively engage in business and still retain the benefit of limited personal liability. Compliance with applicable State law is mandatory, requiring the filing of Articles of Organization with the Secretary of State or similar body. Failure to comply with state law can be disastrous and result in full liability to each of the owners for all the obligations of the LLC. In return for compliance with the law, the State agrees to treat the entity like a corporation for limited liability purposes, but it operates like a partnership in all other ways.
LLCs have the option to elect to be taxed either as a corporation or as a partnership. Generally, if the corporate election is made, the entity will be taxed at the entity level (like a corporation); if the partnership election is made, the tax liability flows through to the members’ individual tax returns, and there is no additional taxation at the entity level. “Special allocations” are permitted. An individual may form a LLC, and elect to be treated as a partnership (remember, a true partnership requires at least 2 partners) – this effectively permits a sole proprietorship to operate with the protections of a corporation and the flexibility and ease of a limited partnership.
LLCs may be taxed by certain States through excise taxes. Income distributed to the members is generally treated as “active” income and is subject to self-employment tax.
The LLC must include the designation “LLC” in the name of the entity.