An LLC, or limited liability company, can be considered to be a marriage between a corporation and a partnership. Basically, with an LLC you get many of the same benefits that a corporation enjoys, without the majority of the formalities that come with a corporation. The multiple owners, called members, of an LLC get treated like a partnership for tax purposes. It passes through taxes on income directly to its members, so, unlike a corporation, the LLC itself never pays taxes. Income from an LLC is taxed only once because it passes straight through the business, onto the owners. Therefore, an LLC does not suffer from the double-taxation issue that a corporation deals with. But, an LLC still pays any payroll taxes required by the federal and state governments. When you set up an LLC, you choose how you choose the tax treatment desired. You can be taxed like a sole proprietor, a C corporation, or an S corporation. The choice is yours. Assuming that the LLC is set up correctly, and personal and business activities are completely separated, the members are afforded personal liability protection. This is one of the biggest reasons to form an LLC versus operating as a sole proprietor. Also, a business earns more respect when it has a formal structure, such as an LLC. When the formation paperwork is drawn up for a limited liability company, the person doing the work does not have to be a member of the LLC. This allows the company owners to use one of the several very reputable online formation services. This also ensures that your LLC is properly set up so there will not be any issues down the road. A members liability is limited to the financial contribution made by that member. And an LLCs structure allows you to bring in multiple partners, who can either be actively involved in the business, or serve as silent investors. A limited liability company is a business organization, or business structure, that is very similar to a corporation, but offers more flexibility to its owners. It is a structure that is suitable for smaller companies in which the number of owners is limited. The limited liability company is a fairly newly created business structure in the United States. Just a little over twenty years ago the LLC was recognized by only two states. Now days, every state allows you to form an LLC.
While corporations have rigid rules about how they are structured, partnerships and limited liability companies allow the division of management authority, profit sharing and ownership rights among the owners to be very flexible.
Partnerships fall into two categories. General partners are subject to unlimited liability. If a business can't pay its debts, its creditors can demand payment from the general partners' personal assets. General partners have the authority and responsibility to manage the business. They're analogous to the president and other officers of a corporation.
Limited partners escape the unlimited liability that the general partners have. They are not responsible as individuals, for the liabilities of the partnership. These are junior partners who have ownership rights to the profits of the business, but they don't generally participate in the high-level management of the business. A partnership must have one or more general partners.
A limited liability company (LLC) is becoming more prevalent among smaller businesses. An LLC is like a corporation regarding limited liability and it's like a partnership regarding the flexibility of dividing profit among the owners. Its advantage over other types of ownership is its flexibility in how profit and management authority are determined. This can have a downside. The owners must enter into very detailed agreements about how the profits and management responsibilities are divided. It can get very complicated and generally requires the services of a lawyer to draw up the agreement.
A partnership or LLC agreement specifies how profits will be divided among the owners. While stockholders of a corporation receive a share of profit that's directly related to how many shares they own, a partnership or LLC does not have to divide profit according to how much each partner invested. Invested capital is only of the factors that are used in allocating and distributing profits.
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