what is an llc?
LLC is an abbreviation for ‘Limited Liability Company”. An LLC combines the limited liability features of a corporation with the tax benefits and ease of operation associated with a partnership or sole proprietorship. While, like an S- corporation, an LLC limits the owner’s exposure to personal liability, it (the LLC) is usually easier to manage from the standpoint of governmental compliance.
For instance: forming an LLC does not require as much formality as an S-Corporation, and the governance of an LLC is also less
formal because it is managed without the structure of elected CEO’s, Directors, or Officers. An LLC is managed by the owners; where two or more owners are
present, they are legally referred to as “Partners” or “Members” of the
LLC’s file taxes on April 15; single member LLC’s (SMLLC’s) file a 1040 and Schedule C like a sole proprietor; partner/members in an LLC typically file a 1065 partnership tax return like owners in a traditional partnership.
The owner/partner/member of an LLC is considered to be self-employed and must pay the 15.3% self-employment tax contributions toward social security. Therefore, the entire net income of the LLC is subject to this tax.
The profit, (unless elected as a C- Corporation) also flows through to the owner/member/partners personal taxes, based on their
agreed upon division, and is subject to ordinary income tax of each owner/partner/member, respectively.
llc vs. corporation
There are fewer restrictions on profit sharing within an LLC because members distribute profits as they see fit. Members might contribute different proportions of capital at the establishing of the LLC. Therefore, the members may decide to share profits based on the initial capital contributions, or may decide to share them on an entirely different basis.
However, LLC’s are not able to raise capital in the same fashion as a corporation. A corporation has stock to sell or pledge as a means of leveraging money for the purpose of capital improvement or asset acquisition. This is not the case for an LLC. The member/partners can borrow money in order to raise capital, but an LLC has no ability to pledge stock as collateral; nor can it sell stock.
Additionally, if your plans include taking your company public or issuing shares to your employees, then you might prefer a corporate business structure.