A limited liability company, or LLC, exists as a hybrid entity that combines the flexibility of a partnership and the limited liability protection of a corporation. An LLC is a relatively new type of business entity, with Wyoming becoming the first state to allow LLC formation in 1977. LLCs have other similarities to a corporation, such as few ownership restrictions and continuity of existence. But LLCs cannot issue stock.
Owners of an LLC are called members as opposed to shareholders. No ownership restrictions are imposed on an LLC in terms of size. An LLC may form with a single member or an unlimited number of members. An LLC member may be an individual, corporation, another LLC or a partnership. An LLC may accept foreign nationals and foreign businesses as members of the business. Banks and insurance companies cannot gain membership into an LLC.
A corporation has the ability to issue stock as a way of raising money to finance the company's operations. A public corporation has the ability to trade shares of the company on the New York Stock Exchange and Nasdaq. A corporation will continue to exist despite changes in ownership. This means a company shareholder may sell his shares to another business or individual without interrupting the company's day-to-day activities. Also, corporations have the ability to attract employees by offering stock in the company.
An LLC has the ability to get taxed like a partnership, sole proprietorship or a corporation. Even though an LLC may elect taxation as a corporation, the company does not have the ability to issue stock as a way of raising capital. However, an LLC can issue membership units to members that signify ownership in the business. The ownership interest of each member should be listed in the LLC's operating agreement. Unlike a corporation, an LLC does not have to allocate profits and losses according to ownership interest in the business. For example, a member may own a 10 percent interest in the business while receiving a 20 percent share of company profits and losses.
An LLC that elects taxation as a corporation becomes subject to double taxation. This means the LLC must pay taxes on company profits as a business entity, just like a corporation. In this scenario, an LLC must pay taxes on company profits at the company's applicable corporate tax rate. The second tax occurs because members of the business must report distributions received from the company on their personal income tax return. Distributions from the LLC are taxed at a member's personal income tax rate.
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