Limited Liability Company
A Limited Liability Company, also called an LLC for short, is a flexible type of business structure. Unlike a Sole Proprietorship or a Partnership, a Limited Liability Company in the eyes of the law is separate from its owners. It is its own entity. This separation allows the owners to “limit” their “liability” – as owners of a limited liability company are not liable for the business’ debts and cannot be sued for the businesses actions.* An LLC does not need multiple owners, but it can have them. A single member LLC is a popular alternative to a sole proprietorship, as you can later add more members to your LLC and receive the limited liability benefits. Owners of an LLC are called Members and unlike a sole proprietorship which is limited to one owner, an LLC can have up to 500 members. Members don’t need to have equal ownership either.
For webmasters and freelancers who are looking to build a real business online, LLCs are a popular way to structure your business, as the costs are quite low and the benefits high.
*(No business owner is 100% immune from liability, as courts can find the business owners liable in exceptional cases – especially if they involve fraud or misrepresentation)
Limited Liability Company Taxation
Much like a Partnership, earnings in a Limited Liability Income are “pass through”, meaning the owners receive all of the business’ profits and losses, and must report these as business income on their individual tax return. The actual “LLC” itself is not taxed by the federal government or state government, as the LLC’s earnings simply “pass through” to the owners.
Filing Taxes as a Limited Liability Company
Unlike a sole proprietorship, LLCs are required to file annual returns with the IRS to document earnings. Revenues and expenses must be reported on IRS Form 1065 and after completing form 1065, Schedule K-1 (Form 1065) must be created for each partner. Schedule K-1 shows the partner’s share of the profits or losses, which he can then show on his own personal income tax return. So if your LLC has two equal members (50% share each) and $5,000 profit, each Schedule K-1 should show $2,500 on Part 3 – Line 1 “Ordinary Business Income (loss).
In addition to filing form 1065 (which is for the Federal Government), an LLC must file a tax return on the state level as well. Each state has their own rules and regulations – so make sure you visit your state’s official department of the treasury / tax website and complete the correct forms.
Advantages of a Limited Liability Company
- Limited Liability
- Low maintenance / overhead compared to a C-Corporation
- Flexible structure – can elect to be taxed as a Sole Proprietorship, Partnership, S-Corporation or even C-Corporation.
Disadvantages of a Limited Liability Company
- Annual fee with your state.
- Difficult to raise capital and sell equity (As you can’t issue shares like you could with a C-Corporation)
Additional Resources / Further Reading: