A limited liability company (LLC) is a relatively new type of business legal form that provides some liability protection (like a corporation) and other features similar to a partnership. The owners of a limited liability company (LLC) are called members.
Each member is an owner of the company; there are no owner shares, as in a corporation. An LLC is formed in a state by filing Articles of Organization or similar document in some states. The federal government, including the IRS, is not involved in forming an LLC.
There are two types of LLC memberships, depending on the number of members - a single-member LLC, and a multiple-member LLC. There is no difference between a single-member LLC and a multiple-member LLC in how they run the business, but there a difference in how they are taxed.
The states don't impose many restrictions on LLC membership, except that members must be 18 or over. They don't have to be US citizens. Almost any organization can be a member of an LLC, including corporations, s corporations, other LLCs, trusts, and pension plans. Sometimes a holding company will be formed, which owns the LLC.
Some states require that the members of an LLC be identified, while other states do not have this requirement. If the LLC is a Professional LLC, the members usually must be identified and their professional licenses must be examined and approved when the company is formed.
If the LLC is a Professional LLC (PLLC), owners must be registered professionals in that profession. For example, if the PLLC is formed to practice dentistry, only dentists licensed in that state can be members. State laws vary on what types of professionals can form a PLLC.
As with any other type of business, there must be a manager in charge of the LLC for day-to-day and long-term decisions. The members can choose to manage the LLC themselves, or they can designate or hire a manager or managers. The management of the LLC is usually spelled out in the application with the state and also in the LLC operating agreement.
If the members decide to manage the LLC themselves, they can set up the management any way they like. There is no formal board of directors structure required but it's a good idea for the LLC members to meet at least annually and to keep records of the decisions they make at their meetings.
The members of an LLC are taxed based on the number of members. Here's what that means: A single-member LLC is taxed as a sole proprietorship, which means that the sole member's taxes are determined by the net income on Schedule C and then passed through to the member's personal tax return.
A multiple-member LLC is taxed as a partnership, so each member's share of the net income or loss is passed through to the member's personal tax return. In a multiple-member LLC, the operating agreement determines each member's share in the duties of the business and in the profits and losses of the business. An LLC can also elect to be taxed as a corporation or S corporation, and the members then would pay tax in the same way as corporate shareholders or S corporation owners.
LLC members are considered self-employed and not employees. So, yes, they must pay self-employment tax on their share of the business net income.
Limited Liabilities of LLC Members
The members of the LLC have limited liability for debts of the business unless they have personally guaranteed loans or other debts or they act outside the bounds of their duties for the business. For example, limited liability can't protect a member who breaks the law or who harasses someone. The liability of an LLC member is similar to the liability of an S corporation shareholder.