A Limited liability company ("LLC") is a fairly new and adaptable business structure. It’s also one of the most popular business structures for many small businesses. That’s because an LLC offers many of the benefits of sole proprietorships, partnerships, and corporations, while reducing many of the drawbacks from these different business structures. In essence, an LLC is a hybrid between a partnership and corporation.

To form an LLC, however, you must actually file paperwork in the form of articles of organization (or other similar name) with your state’s agency like the secretary of state. You’ll also have to create an operating agreement to dictate how the LLC will run. So, as you can see, you’ll have more business formalities to deal with in setting up an LLC than in setting up a sole proprietorship or general partnership.

However, there are many benefits of setting up an LLC. Perhaps the 2 best benefits include (i) limiting your personal liability and (ii) paying taxes like a partnership, i.e. only once.

When you file paperwork to set up an LLC, you’re telling the government that your LLC is a separate "legal person." The "legal person" concept comes from corporations (LLCs are a much newer form of entity than a corporation). This means that the state treats the LLC like a separate individual in many respects. An LLC can buy and sell property, sue and be sued, pay taxes, etc. It also means that if a creditor or plaintiff sues the LLC, you as an individual owner of the LLC will generally not be personally liable for the LLC. This is a big difference from sole proprietorships and general partnerships, where the individuals are personally liable. So, when you form an LLC, you limit your personal liability.

As an LLC, you can also be taxed as either a partnership or a corporation. It’s up to you. It’s often a good idea to be taxed as a partnership because you’re only taxed once – at your personal tax rate. However, sometimes for strategic reasons, LLC owners elect to be taxed as corporations. Corporation’s profits are taxed 2 times – (i) at the corporate tax rate and (ii) at the individual’s tax rate (which we’ll discuss in the next page). If you do want to be taxed like a corporation, you must actually make that election on Form 8832 with the IRS.

The general taxes and liabilities for LLCs are as follows:

Next, we’ll briefly go over the corporation business structure.