Limited Liability Company (LLC) is a legal business structure. It creates a legal entity that’s separate from its owners (members), protecting them from personal liability for the business’s debts.
There are no restrictions on who can own LLCs. They can have 1 or many owners, including foreign investors, corporations, and other LLCs.
Small businesses often prefer LLCs because they balance the simplicity of sole-propreitorships with the limited liability (protection of personal assets) corporations offer.
Partnership: An LLC can be taxed as a partnership when it has two or more owners, also known as members. In this case, the IRS will automatically treat the LLC as a “pass-through” entity for tax purposes, which means that the LLC itself does not pay taxes on its profits. Instead, the LLC’s profits and losses are not taxed at the entity level; rather, they are distributed to its members, who report them on their personal tax returns. This is similar to the way that a partnership is taxed.
C – Corporation: An LLC can be taxed as a corporation by filing Form 8832 with the IRS and indicating that it wants to be taxed as a corporation. If the LLC is taxed as a corporation, it will be treated as a separate entity for tax purposes and will pay corporate income taxes on its profits. This can be advantageous for LLCs that have a significant amount of profits and want to retain earnings in the company, as corporate tax rates may be lower than individual tax rates. However, it’s important to weigh the benefits and drawbacks of being taxed as a corporation before making the election.
S – Corporation: An LLC can be taxed as a S – Corporation by filing Form 2553 with the IRS and meeting certain eligibility requirements. If the LLC meets these requirements and makes the S corporation election, it will be taxed as a pass-through entity, similar to a partnership. The LLC itself does not pay federal income taxes on its profits. Instead, the LLC’s profits and losses are passed through to its shareholders, who report them on their individual tax returns. This can lead to increased tax savings for both the LLC and its shareholders, as they may avoid double taxation on corporate profits.
Key Takeaways- For small business owners, creating an LLC is usually the starting point because it’s simple and flexible but also provides legal protection for the business owner.
Unfortunately, there is no one-size-fits all answer to whether a business should be an LLC or corporation. When trying to decide what it is right for your business, consider your annual profits, your capability to perform daily corporate compliance and the possibility of raising outside investment.
