A limited liability Corporation (LLC) is the most popular business structure for good reasons. The LLC, like a regular corporation, provides business owners protection for their personal assets against claims on the business, but still allows the business the flexibility of operating like a partnership or a sole proprietorship. The LLC is suitable for many types of business and has fewer restrictions than many other business structures. The LLC can have a single member or an infinite number of members. Members can include individuals, corporations, other LLCs, and foreign entities. There are only a few types of businesses that are not allowed to operate with the LLC structure such as banks and insurance companies.
Taxation of an LLC
For tax purposes an LLC must be classified as a sole proprietorship, a partnership, or a corporation. This is another aspect of the flexibility of LLCs. A single member LLC may choose to be classified as a corporation or as a sole proprietorship. An LLC with more than one member may choose to be classified as a corporation or a partnership. An LLC should formalize its choice by filing form 8832 with the IRS within two and one half months after registration. If form 8832 is not filed, a single member LLC will be classified for tax purposes as a sole proprietorship and the multi member LLC will be classified as a partnership.
Record keeping for an LLC
While the management of LLCs can be more informal than regular corporations, business owners should be careful to keep business records separate from personal records and to file state required returns. These two actions help to ensure protection of personal assets. If a business owner comingles his personal and business assets and transactions, a court may conclude that there is no difference between the two entities and allow personal asset to be used to satisfy business debts. The LLC exists as a legal entity as long as it complies with state filing requirements. If the state has dissolved an LLC due to noncompliance, the owner’s personal assets may not be protected.
In summary an LLC is a very useful business structure for a variety of business types because:
- It provides protection for personal assets of the owners against claims on the business
- It is simpler to operate than a regular corporation, and therefore is generally less costly
- It is flexible and allows the owners to choose the tax classification that will best serve their needs.