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Limited Liability Company/Partnership (LLC/LLP)

A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.

LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.

Single Member LLCs

Generally, when an LLC has only one member, the fact that it is an LLC is ignored or “disregarded” for the purpose of filing a federal tax return. Remember, this is only a mechanism for tax purposes. It doesn’t change the fact that the business is legally a Limited Liability Company.

If the only member of the LLC is an individual, the LLC income and expenses are reported on Form 1040, Schedule C, E, or F. If the only member of the LLC is a corporation, the LLC income and expenses are reported on the corporation’s return, usually Form 1120 or Form 1120S. If you prefer to file as a corporation instead of as a “disregarded entity,” Form 8832, Entity Classification Election (PDF), must be submitted. Otherwise, you don’t need to file Form 8832.

Multiple Member LLCs

Most LLCs with more than one member file a partnership return, Form 1065. If you would rather file as a corporation, Form 8832, Entity Classification Election (PDF), must be submitted. You don’t need to file a Form 8832 if you want to file as a partnership.

The forms necessary for filing as an LLC depend on the type of federal tax entity that is either elected or defaulted to. Choose the entity that best represents the tax entity under which you will file your federal tax.

Forms for Federal Tax Entities:

LLCs are rapidly gaining favor for their following important features:

  1. They are pass-through entities like partnerships so that profits and losses pass-through them without tax to the underlying members who are taxed at their appropriate tax rates;
  2. They provide a “limit to liability” as no member is liable for the debts of the LLC and the member’s liability, therefore, is limited to the amount of their investment in the LLC;
  3. LLCs have more flexibility than similar “S” corporations (e.g., LLCs can have two types of memberships unlike “S” corporations which can only have one type of stock). In addition, there are some of the legal formalities (such as required meetings and minutes) that apply to “S” and “C” corporations that do not apply to LLCs. However, although all 50 states have LLC structures, there currently is no uniform LLC legal definition, and it is therefore important to check the requirements for your state’s LLC structure;
  4. Dividends are not taxed twice as with “C” corporations;
  5. With the exceptions of the District of Columbus and Massachusetts, there is not a limit or minimum number of investors;
  6. Unlike “S” corporations, you can have individuals and other entities (INCLUDING an IRA!) as members;
  7. They offer flexibility in the distribution of profits and losses unlike “C” corporations.
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