Define Limited Liability Corporation
The limited liability corporation business structure is one of the five commonly used business structures for small and large businesses. Although the other four types are bound by particular rules, a limited liability corporation is markedly more flexible to start and manage. A limited liability corporation structure combines the ease of ownership of a sole proprietorship with the benefits of a corporate organization.
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Liability
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A business formed as a limited liability corporation (LLC) protects the private assets of the owner from any tax or collection action against the business. An LLC creates an entirely new and separate entity apart from the business owners. This arrangement contrasts with a sole proprietorship structure in which the owner's personal assets are tied to the business.
Formation
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Business owners wishing to establish an LLC must do so with their state business regulatory agency, such as the office of their state's secretary of state. Forming an LLC is subject to the requirements of the individual state and generally requires documentation, applications and fees. According to the Internal Revenue Service (IRS), all 50 states and the District of Columbia recognize the LLC structure. However, the IRS does not; LLC owners are required to file IRS form 8832 to elect to be taxed as a corporation, partnership or sole proprietorship.
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Characteristics
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An LLC has different characteristics that make it a popular choice among business owners. For example, an LLC is not required to issue stock to investors. Rather, ownership is concentrated on the members that manage the business. In addition, members can include a single or group of individuals from within or outside the United States. Similarly, another business entity may also serve as a member of an LLC.
Taxes
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An LLC is commonly taxed as a sole proprietorship. This taxation structure allows the earnings from the LLC to be taxed when members draw income and report it on individual income tax returns. As a result of this income pass-through feature, income the business generates is taxed only once. This is in contrast to corporate taxation structures, wherein business income is taxed at the corporate level and then again at the individual level when stock holders report gains from their investments.
Differences
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LLCs offer more managerial flexibility than corporate and partnership structures. For instance, an LLC does not sell stock and is not required to hold stockholder meetings or distribute dividends. In addition, employees cannot receive compensation or bonuses in stock because stock is only issued by corporations. Generally, an LLC can be made up of one owner/operator who controls all the business interests. These differences make LLCs a suitable choice for start-ups and growing businesses.
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