What is a Limited Liability Corporation - LLC and Tax Responsibilities

Popularity has grown with the Limited Liability Company (LLC) because it combines some of the

best features of a partnership and a corporation. The owners (called “members”) of the LLC are not personally responsible for debts and there is no dual taxation. However, business earnings are taxed to its members. Another difference between an LLC and a corporation is that LLC’s do not have to distribute income in proportion to the interest of a member. Distribution of profits in an LLC is subject to employment tax. Unlike S Corporations, this entity allows for more than 75 shareholders and in some cases, two or more classes of stock may be created. Overall, in an LLC, no member has personal liability and members enjoy the flexibility it provides for ownership and business management.

HOW DO I MANAGE AN LLC?

Member-managed or manager-managed. In a member-managed LLC, all members (owners) manage all business transactions. A manager-managed LLC only has a certain number of members making the decisions, while the other owners share the profits. In this type of entity, decision-making members decide who will have what responsibility in the company. Sometimes, titles are given such as “president” and “vice-president”.

HOW DOES THE IRS VIEW LLCS?

The IRS treats single-owner LLCs as sole proprietorships, and all business revenue and expenses are shown on Form 1040 schedule “C”. If two or more members own the LLC, it may be classified as either a partnership or a corporation for tax purposes. Refer to www.irs.gov for additional information.

WHAT IS A LIMITED PARTNERSHIP?

A Limited Partnership is a partnership that has at least one limited partner and one general partner. To set up an LP you need to file a certificate with the state where the limited partnership was formed. This is usually filed with the Secretary of State.

WHAT ROLE DOES THE GENERAL PARTNER PLAY?

The general partner is responsible for all the business operations, controls cash distributions to the

partners, and handles management decisions. The general partner has unlimited liability and stands to lose the most if sued. Creditors of the partnership can go after the general partners’ personal assets if the limited partnership’s assets are insufficient. The general partner is also liable to third party lawsuits, such as a slip and fall. Therefore, instead of you being the general partner, set up a corporationor limited liability company. It will give greater liability protection to its owners.

WHAT IS THE ROLE OF THE LIMITED PARTNER?

The limited partner has no control over management decisions and generally has no liability other

than their financial contribution to the partnership. Should the company be sued, creditors cannot

confiscate their personal assets. In exchange for this limited liability, the limited partner forfeits his rights to manage and control the partnership.

WHAT IS A LIMITED LIABILITY COMPANY (LLC)?

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WHAT IS A C CORP? What are the Tax Responsiblities ?

HOW DOES A C CORP PAY TAXES?

A C corporation has a separate legal and tax life distinct from its shareholders. A corporation pays taxes at a corporate income tax rate and files its own corporate tax forms each year (IRS Tax Form 1120).

WHAT ARE THE RULES AND REGULATIONS REGARDING A C CORP?

To retain the corporate existence and thus the benefits of limited liability and special tax treatment,those who run the corporation must follow corporate rules. Annual meetings must be held, minutes of the meetings must be taken, and officers must be appointed. Most importantly, the corporation should issue stock to its shareholders and keep adequate capitalization on hand to cover any anticipated business debts.

CAN I AVOID DOUBLE TAXATION?

Generally, corporations are taxed on its own profits. Any profits paid out in the form of dividends are taxed again to the recipient as dividend income, at the individual shareholder’s tax rate. However,most small corporations seldom pay dividends. The employee/owners are paid salaries and fringe benefits that the corporation may deduct on their taxes. The result is that only the employee/owners end up paying any income taxes on this business income and double taxation rarely occurs.

The name “C Corporation” refers to a legal business entity chartered by the state. To have a C Corporation

you must file Articles of Incorporation and pay the required state fees and taxes with the

appropriate state agency (usually, the Secretary of State).

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