What Does LLC Mean for a Company?

A limited liability company (LLC) is a type of business in which the owners, called members, have much less liability for company actions and debts than a company like a corporation, according to the Internal Revenue Service. Many new business owners form their companies as an LLC instead of traditional C and S corporations because of the LLC's legal and tax advantages.

Up until the mid-1970s, companies only had the choice of forming a corporation or partnership, and both had severe disadvantages. Partnerships have little legal protection from company debt obligations and lawsuits, but are taxed only once. Corporations, on the other hand, face double taxation because the tax code applies to net profits and capital gains, but offer legal protection to their shareholders. LLCs essentially combine the best features of corporations and partnerships.

Under LLC statutes, a company automatically qualifies for a "tax pass-through." Tax pass-through means that the company does not pay taxes on net profits; the owners pay taxes on income from the business that's shown on their personal tax returns. The biggest benefit is that shareholders and owners retain no responsibility for debts unless someone specifically signs an agreement taking liability for a debt.

Despite LLCs' popularity, you may still want to form an S or C corporation in certain circumstances. LLC companies are a relatively new type of business entity as of 2010, so many investors are hesitant to invest in an LLC until they are better understood, according to the Gaebler website, a resource for entrepreneurs. In addition, LLCs usually have higher legal fees because S and C corporations already have pre-made agreements.

As of 2010, LLC businesses are not recognized by the federal government, according to the IRS. An LLC has to file as a corporation, partnership or sole proprietorship on its tax return—most LLCs are automatically considered a corporation. Certain types of business, such as banks and insurance companies, cannot form an LLC, but actual restrictions on forming an LLC depend on the laws of the state in which the company resides.

You can quickly convert any business into an LLC in most states by filling out a simple form called a "certificate of conversion," according to legal information website Nolo. Other states require formal articles declaring the formation of an LLC. In addition, every potential LLC must transfer all pertinent business information, such as identification numbers and sales tax permits, to the new entity. A few states require a newspaper article declaring the end of a partnership and the formation of an LLC.

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