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Real Small Business: Building Your Business

Basics of a Limited Liability Company

From the Editors of Real Small Business

A limited liability company (LLC) has the liability protection of a corporation but the tax status of a partnership. In other words, while you get liability safeguards similar to those of a corporate shareholder, you pay taxes on the personal rate on your share of the profits or use the loss to offset other income.
While an LLC has many of the same characteristics as an S corporation or a limited partnership, it is, in many cases, more flexible. For example, it is possible to use an LLC: to bypass the restrictions on S corporation ownership, to allocate profits differently from ownership interests, or to avoid the general partner's personal liability in a limited partnership.
Various states have different sets of restrictions, so it is advisable to check with your state department of taxation first to find out the applicable state laws and if your company would qualify to be an LLC. It's also a good idea to speak with your accountant or tax advisor.
Filing to form an LLC can be extremely complicated, and the paperwork needs to be completed meticulously, so you probably want to hire an attorney to help you. You need to follow the state rules that govern formation of an LLC in your state, and file the proper forms with the correct state bureau. You also will need to observe IRS guidelines in your LLC operating agreement (governing the relationships and responsibilities of the LLC owners) so that you qualify for taxation as a partnership rather than a corporation.
Advantages
Liability protection similar to a corporation, but tax status of a partnership Potentially provides greater flexibility than an S corporation or a limited partnership
Disadvantages
Extremely complicated filing procedure that requires strict adherence to state and federal guidelines