What Do the Initials LLC Mean?
- Sometimes explained as a hybrid of a partnership and a corporation, an LLC offers liability protection similar to that of a corporation alongside the tax flexibility of a partnership. An example of what is known as a pass-through entity when it comes to taxation, LLC status enables owners to report their share of profits or loss on their individual tax return, though they may also opt to have them treated as S corporations or C corporations by the Internal Revenue Service. The structure of an LLC also enables members to divide earnings as they wish; shares of profits and losses don't have to be proportional to the member's shares of ownership. In addition to tax advantages, forming an LLC allows an organization to have members who are not citizens or permanent residents of the United States and simplifies the record-keeping process because the holding of annual meetings and keeping of minutes are not required.
- Some states--Delaware, Illinois, Iowa, Nevada, Oklahoma, Tennessee and Utah--allow the formation of a series LLC, a type of LLC consisting of several cells, or series, each of which is protected from the liabilities of the others. A series LLC can serve as a holding company for assets and reduces the costs that would be incurred by forming legally separate entities. In some states, such as Delaware, a series LLC is taxed as a single entity, but a company formed as series LLC in Delaware would have to pay taxes on each series if it were doing business in California.
- A professional LLC is another type of limited liability company that can be formed in about two-third of all states. Professional LLCs can be formed by members such as accountants, doctors, lawyers or other professionals licensed by the state to provide professional services. Usually all owners must be professionals practicing in the same field. The liability protection offered by a professional LLC does not include protection from professional malpractice claims.
- Real estate investors often form LLCs instead of corporations to protect personal assets from claims or lawsuits because real estate LLCs do not require the formalities that corporations do--like the holding of annual meetings--and allow the owners to create operating agreements that define and limit the rights and obligations of managers and members.
- A tax return must be filed for an LLC as well as by each of the members within it, but no separate federal tax is levied on the company itself, so the company return is simply for information. Shares and profits can be divided up however the members wish. For federal income tax purposes, an LLC can be classified as a partnership, corporation or as an entity that is not separate from the owner. Special rules might apply to banks, insurance companies or non-profit organizations that are LLCs or that own LLCs. An LLC with two members is considered a partnership by default, while one with only one member is not treated as a separate entity from its owner for federal income tax purposes. These default classifications can be changed so that an LLC is taxed as a corporation. An LLC generally can't change its classification again for 60 months following the effective date of the first change.