Forming an LLC, the limited liability company (LLC) is a distinct business entity that combines the corporate advantage of limited liability protection with "pass-through" taxation, the method of taxation afforded to both general partnerships and S corporations.
Like corporations, LLCs come into existence after making a filing with the appropriate state body, typically the Secretary of State, and paying the necessary state filing fees. The LLC formation documents are typically called articles of organization or a certificate of organization.
In terms of taxation, the LLC’s income is not taxed at the entity level as is that of a C corporation. While the LLC does complete a tax return, the income or loss of the LLC as shown on this return is passed through the LLC and is reported on the owners’ individual tax returns. The LLC’s owners then pay taxes on the LLC’s profits at the individual tax level. LLCs can elect with the Internal Revenue Service (IRS) to be taxed like a C corporation, but this is not overly common.
Regarding the ownership of an LLC, the owners are called members.
Members are analogous to shareholders in a corporation or partners in a
partnership, depending on how the LLC is structured. Members will more
closely resemble shareholders if the LLC utilizes a manager or managers
because the members will not directly participate in the management of
the LLC. If the LLC does not utilize managers, then the members will
more closely resemble partners because they will have a direct say in
the decision-making of the company. An LLC must specify at the time of
formation whether it will be managed by members or managers.
A member’s ownership of an LLC is represented by "membership interest," just like a partner’s interest in a partnership or a shareholder’s shares of stock in a corporation.
When evaluating whether the LLC is the right business structure for your particular business, it is advisable to first determine the goals of your business, and then to assess the advantages and potential disadvantages of the different business structures in relation to those goals. You may also wish to seek the advice of an attorney or accountant.