Technically, LLC is the abbreviation for limited liability company, although many people call them limited liability corporations. It’s purely semantic. An LLC is a hybrid business entity that provides the limited liability features of a corporation and the operational flexibility and tax efficiencies of a partnership. For tax purposes, an LLC is separate from its owners.
LLCs pay no income taxes, but they must file an annual informational tax return. LLC members report their share of the LLC’s income and expenses on a Schedule C attached to their personal tax returns and pay their share of its income taxes.
What identification number goes on the LLC’s informational tax return depends on who owns it. If owned by a single person, that person’s Social Security Number is used. If owned by multiple people, it must have an Employer Identification Number (EIN). If your LLC needs an EIN number, you can apply for one from the IRS or use a third-party provider like Gov Doc Filing.
Like corporations, LLCs protect their members’ personal assets, give the company more credibility, protect the company’s brand, and are regulated by the state in which they’re located. LLC owners do not need to be U.S. citizens or permanent residents. However, unlike regular corporations, LLCs are not required to hold annual meetings or record minutes.
Like partnerships, LLCs offer great flexibility when it comes to ownership rights and percentages, as well as allocation of income and tax deductions and credits.
Forming an LLC
Forming an LLC is very similar to forming a corporation. What rules apply, what documents you must file, where you must file them, and how much the filing fee will be depends on the state in which your LLC is located. There are five basic steps:
- Choose an available name.
- File the paperwork, usually called Articles of Organization, and pay the filing fee.
- Create an Operating Agreement, a legally binding document setting out the rights and responsibilities of the LLC members.
- Publish a notice of intent to form an LLC (not required in all states).
- Get any required business licenses and permits.