What Are Limited Liability Companies (LLC)?

A Limited Liability Company (LLC) is an incorporated entity which is usually treated, for Federal tax purposes, as a limited partnership. The shareholders (called "members") are issued Form 1065, Schedule K-1, from which they report their share of the LLC's income on their personal tax return.

Advantages of LLC's:

Same Limited Liability as corporations
S-Corp restrictions on number of owners does not apply
Can be owned by corporations

Disadvantages of LLC's:

Must have at least two owners (S-corp can have one owner.)
Earnings may be subject to SE Tax
Income tax cannot be deferred by retaining profits.
Life of LLC may be limited.

LLCs are very much the "new kid on the block" in tax law, and there isn't very much in the way of case law on how to handle unusual situations. The laws governing LLCs vary from state to state, and not all states will recognize a "foreign" (from another state) LLC. It would be wise to seek out professional guidance if you are contemplating this form of business enterprise.

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Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.