Explanation of LLC

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An LLC, or limited liability company, is a business structure that lies between sole proprietorship and full-blown incorporation. Each person in an LLC is called a member, and LLCs can be run by one or many members.

Advantage

  • The LLC structure separates an individual's property from that of the company, meaning that in the case of debt collection and lawsuits, only the company's assets, not private assets, are subject to seizure.

Taxation

  • The IRS classifies LLCs as pass-through entities. A single-owner LLC is taxed as a sole proprietor, and a multi-member LLC as a partnership. All LLCs can choose to be taxed as a corporation.

Reporting

  • Tax is reported on the personal tax return with informational returns sent to the state office and, in the case of partnerships, the IRS. Unlike a corporation, LLCs do not need to keep minutes of meetings.

Formation

  • Send the LLC Articles of Incorporation (company basics) form and fee to your state's LLC office. (In many states, this is the Secretary of State.) You may also need to send your Operating Agreement, which details the LLC's business as well as the members' financial and managerial rights and duties.

Management

  • The company can be set up as managed by all its members or only certain managers as laid out in the Operating Agreement.

Warning

  • LLC owners must keep business and private finances separate, or they may forfeit the limitation of liability.

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