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Lesson 1: Business Forms

Limited Liability Companies

A limited liability company (LLC) has a more formal business structure. An LLC is formed by filing a document with the Department of State in the state where the business is located. This document is sometimes called a certificate of organization, but its name can vary from state to state. The document identifies the name of the business, its address, its purpose, and the person or persons forming the business.

The individual or individuals that form an LLC are called members. The LLC is then either managed by the members collectively or a managing member is selected to run the day-to-day operations of the business. This form of business also includes the preparation of an operating agreement, which is similar to a partnership agreement in that it describes how the business will be run, how decisions will be made, how profits and losses will be shared, and how a member could be removed from the business.

An LLC provides the liability protection of a corporation and the tax benefits of a partnership. Members’ liabilities are limited to the assets of the LLC; their personal assets are not at risk unless they act inappropriately  (for example, by  defrauding a customer). An LLC would still want to have business liability insurance to protect and defend itself against lawsuits.

In a partnership or an LLC with more than one member (which, by default, is taxed like a partnership), the tax burden is shared among the partners based upon their ownership interest. The tax burden is thus "passed through" to the partners for their portion of the profit or loss. Their portion is provided to them on a Schedule K-1 form.

For tax purposes, an LLC can be treated the same as a sole proprietorship if it is made up of one member; the individual's Social Security number would be used as the business's tax identification number, and tax would be passed through to the individual's tax return. An LLC can be treated the same as a partnership if there is more than one member; it would be taxed in same manner as a partnership and use a K-1.  An LLC can also elect to be taxed as a corporation. When an LLC elects to be taxed as corporation, a separate tax identification number is obtained, as in a partnership; however, unlike  a partnership's number, the tax identification number is used to file a separate tax return for the corporation. The income for a corporation is not passed through to its owners as in a sole proprietorship, single-member LLC, or partnership.

LLCs provide a lot of flexibility,  making them the most popular business form.


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