A limited liability company or LLC is an organization owned by one or more individuals or corporations. Members own membership interests in the company and not shares. LLC is a recently developed type of legal entity. For many entrepreneurs, it is the ideal option, as it has the tax advantages of the limited partnership and the limited liability element of corporations.
The LLC is a separate legal entity and the responsibilities are not passed on to the members. The management and organization of the LLC are flexible and are governed by the Membership Agreement. Owners can run the LLC where all owners vote on all issues or managers can run it. Owners elect one or more managers, much like a board of directors. These managers run the business, freeing the owners to vote on every operational detail. The IRS does not recognize the LLC as a separate category. A single member LLC has to file as a sole proprietorship, while a multi-member LLC can be taxed as corporations or partnerships.
The reason for the popularity of the LLC is that it satisfies the demands of accountants and lawyers. The LLC is a transfer entity. This means that there is no double taxation, as is the case with corporations. Accountants tend to prefer the LLC, because they are concerned about the dangers of double taxation if their clients form a corporation. Corporations have to pay taxes on their income. Its shareholders have to pay taxes on the same income, when they pay taxes on dividends. In the LLC, each partner’s or member’s contribution to the net profit or loss for the year goes on the individual taxpayer’s individual 1040 tax return. The LLC is not subject to any tax. Lawyers generally prefer LLCs as they offer greater asset protection to members.