This is an excerpt from a presentation I give to college students and to prospective entrepreneurs about types of business entities.
A college professor (who’s also an attorney) told me that my presentation on this subject is the best, clearest and most-concise overview of the topic that she’s ever seen.
I’m flattered by the compliment, and will try to translate those positives into a series of blog posts.
We’ve now reached the section on LLCs.
An LLC is a “limited liability company.” Note the “C” stands for “company” and not “corporation.”
LLCs are legal entities formed under state law. LLCs provide legal protection much like a corporation, but LLCs are easier to form and are generally easier to administer.
Owners of an LLC are referred to as “members.”
Advantages of LLCs
- Easy to form. For example, a one-person LLC can be formed in Iowa by filling out a simple form and filing it online with the Iowa Secretary of State along with a $50 fee.
- Anyone from anywhere, and any type of business entity, can be a member in an LLC. Compare this with the S-corporation rules, where only individual U.S. citizens can be owners.
- LLCs can choose how they’re taxed.
More About LLCs and Taxes
Here are the tax rules for LLCs:
- A 1-person LLC is, by default, taxed as a sole proprietorship
- An LLC with 2 or more owners is, by default, taxed as a partnership
- Any LLC can elect to be taxed as an S-corporation or a C-corporation by filing forms with the IRS
Note that by electing S-corporation status, the LLC loses much of the flexibility of being an LLC — for tax purposes it must abide by the S-corp rules. This is true even though the entity is still an LLC for legal purposes. Because it elected to be taxed as an S-corp, it has to behave like an S-corp for tax purposes.
Disadvantages of LLCs
- As mentioned above, if an LLC elects to be taxed as a corporation, it must follow all of the S-corp (or C-corp) tax laws. This means an LLC with a business entity or a foreign person as an investor wouldn’t be able to be taxed as an S-corp.
- This is something I’ve heard attorneys say: there’s not nearly as much case law on LLCs as there is on corporations when it comes to things such as legal liability. This is a legal, rather than a tax, issue.