Business Entities According to the IRS: Limited Liability Companies

Our final blog in this series will focus on Limited Liability Companies, also known as LLCs. We’ll discuss what an LLC is, the federal tax rate for an LLC, and who benefits the most from filing as an LLC.

For starters, an LLC is a business structure allowed by state statute. However, they are recognized as an entity by the IRS and they are pretty versatile in how they can be taxed. The owners of an LLC are called Members. Generally, the LLC is initially categorized either as a sole practitioner or a partnership by the IRS, depending on whether one or more individuals are involved. However, an LLC can elect to either be taxed as an s-corp or c-corp.

The LLC provides liability protection to individuals that was once only afforded to shareholders. The distinguishing factor of an LLC has nothing to do with how it’s taxed since, in theory, in can be taxed in almost any available manner. The LLC is unique because it provides exactly what is located within its name. The liability of a Member is limited to the assets of the company. Therefore, it is much harder for the corporate veil to be pierced in regards to lawsuits against LLCs.

The taxation of an LLC depends on a few things. Most LLC’s containing only one member are taxed as a sole proprietor, while LLC’s containing multiple members are taxed a partnership. However, the LLC is also allowed to make an s-corp or c-corp election in order to gain their respective tax rate. The flexibility of an LLC’s tax status is one of the most beneficial aspects of the business entity.

If you have any other questions about whether filing as a limited liability company is right for you, the professionals at The Center for Financial, Legal and Tax Planning are more than well-equipped to answer your questions. Please contact us at (618) 997-3436.