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What Is A Limited Liability Company Or LLC?

Jul 1, 2008
An LLC is a legal form of business that has characteristics of both corporations and a partnership. This form of business offers limited liability protection to its owners. In other words the owners of the business cannot be held fully responsible for any debts that the business occurs or actions taken on its behalf. This type of business form is best suited for small businesses with that have a small number of owners and preferably just one.

So what are some of the basic characteristics of a Limited Liability Company? Well for starters the owners of an LLC are not partners or shareholders like they are in other forms of business they are members and every LLC has to have at least one member. Members of an LLC cannot be held personally liable for the debts of the company. This is the same as for a corporation. Just don't make the mistake of signing any documents where you provide your personal guarantee that the company will pay a bill or honor an agreement. If the company for some reason does not pay that bill or live up to an agreement then you can be held liable.

So just like a corporation you as an owner can use an LLC as a form of protection for your personal assets. And depending on the type of business you want to form this can be extremely important if something were to happen. Because being an LLC also provides you with legal protection in case the company was to be sued for some reason. Sometimes being protected from your business is the most important thing of all.

Now how is a Limited Liability Company like a partnership? Plain and simple it's all in the taxes. LLC's are not subject to the double taxation rule imposed on corporations. To explain this rule is easy. If your business is a corporation and you make a profit for the year that profit must be taxed. After the profits are taxed then you as the owner may take the profits and issue them to yourself as the owner and any other people that own a percentage of the business. This of course is your dividend. Well the IRS views the dividend as personal income and it is again taxed as part or your personal taxes. In an LLC the profits are not taxed. They are distributed to the members based on whatever percentages have been previously worked out. Then they are only taxed as personal income when that person files their taxes for the year.

Also if the business loses money for the year all members of the LLC can deduct the equivalent loss percentage from their income. You'll of course need supporting documents to prove the loss to the IRS. And if the members do want to leave their profits in the company for business purposes then the Limited Liability Company can file a tax return of its own.

What most people gain that form a Limited Liability Company is flexibility. You can structure the management however the members see fit. You have the protection of a corporation for your personal assets. And you can elect to either leave your profits in the company, have them taxed or the profits can be distributed and the members can pay the taxes themselves. But you avoid the double taxation penalty that corporations can incur.
About the Author
Cash Miller is an experienced entrepreneur and speaker who has spent over a decade as a small business owner. His years of experience in small business cover a variety of topics. If you are looking for more small business help please check out http://www.smallbusinessdelivered.com
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