The Limited Liability Company -- LLC
-- is a "hybrid" form of business entity.
The LLC offers corporate liability protection without the requirements of
corporate officers, corporate minutes and issuance of corporate stock.
The LLC is a legal entity, not a tax entity.
It is highly recommended a lawyer be engaged to draw up the
organizational papers forming an LLC.
How an LLC is taxed
depends on how many members it has. A single-member LLC is taxed and treated like a
Sole Proprietorship -- the taxpayer files a Schedule C with the
personal tax return. However, a single-member LLC can choose to be
treated as an S Corp, for tax purposes. If there are two or more members
of the LLC, they file a partnership tax return with the appropriate
K-1ís given to the members.
Generally, LLC members are subject to self-employment tax on their
income if the member works more than 500 hours a year in the LLC, has
personal liability for debts or contracts for the LLC. Members of
a "service" LLC (substantially engaged in health, law, engineering,
architecture, accounting, consulting, etc.) are subject to
self-employment tax, regardless of the class of ownership interest.
Crossing state lines can be a major
problem for LLCs. LLC rules are state-specific on how they are
treated. For example, a single-member LLC may not be given corporate
liability protection in another state. If the business will be
dealing or selling outside of US boundaries, the LLC may not be
advisable as the entity of choice. Foreign countries don't
recognize LLC's. Consultation with a
lawyer is critical before choosing this entity.