Limited liability companies (typically referred to as LLCs) have become very popular to entrepreneurs over the last decade. They offer the same limited liability of a corporation, involve only one level of tax, and are also very flexible. With that in mind, an LLC is by no means the “best” type of entity for all businesses, and often they come with greater complexity and cost to organize and operate. Please refer to the Entrepreneur Toolbox above for specific details on the process and cost typically associated with organizing an LLC.
An LLC is, by default, taxed in the same manner as a partnership. Similar to the way S-corporations are taxed, the taxable income and tax attributes of an LLC are passed directly to its owners (which are referred to as its “members”). An LLC have any number of members, however, when an LLC only has one member it is referred to as a single member limited liability company, and is taxed in the same manner as a sole proprietorship (i.e., reported on Schedule C of an individual tax return). Although an LLC enjoys a single level of tax like an S-corporation, an LLC does not enjoy the same self-employment tax benefits as an S-corporation. It should also be noted that an LLC may elect to be taxed as a corporation or under subchapter S, and doing so typically imposes the same limitations applicable to those types of entities.