Careers Business Ownership All About Limited Liability Companies (LLCs) What You Need to Know about LLC Formation, Taxation, and More Share PINTEREST Email Print Business Ownership Operations & Success Business Law & Taxes Sustainable Businesses Supply Chain Management Operations & Technology Marketing Market Research Business Insurance Business Finance Accounting Industries Becoming an Owner By Jean Murray Jean Murray Jean Murray, MBA, Ph.D., is an experienced business writer and teacher. She has taught at business and professional schools for over 35 years. Learn about our Editorial Process Updated on 11/20/19 Limited Liability Companies (LLCs) have been available to business owners since the early 1980s, and they are an alternative form of business which offers some benefits. Learn about LLC taxation, some common myths about LLCs, and other information to help you make a decision about forming an LLC. 01 of 09 What is a Limited Liability Company (LLC)? A Limited Liability Company (LLC) is a business entity recognized in all U.S. states. An LLC combines benefits of a sole proprietorship or partnership and a corporation. The LLC allows the owner to file a simple tax return like a sole proprietorship. It also has a simple business structure without the recordkeeping requirements of a corporation. Sole proprietors and partners don't have the protection of limited liability that owners of a corporation have. The LLC allows corporate-like liability protection for members. 02 of 09 Tax Advantages and Disadvantages of the LLC The LLC has tax advantages and disadvantages compared to other business types, particularly corporations. Since the LLC owner pays taxes at the personal income tax rate, this might be either lower or higher than the corporate income tax rate(currently a flat 21 percent). LLC owners don't have double taxationissues like corporations, but LLC owners must pay self-employment taxes (Social Security and Medicare) on their share of the business net income. LLC owners must pay tax on the total amount of net income of the business, while corporations can keep retained earnings and only pay tax when income is distributed to owners as dividends. 03 of 09 What is a Member of an LLC? Owners of an LLC are called "members," similar to the term "partners" for owners of a partnership. Members are like partners, but there are some differences. One person can own an LLC (called a single-member LLC), like a sole proprietor. Or, the LLC can be owned by two or more people, like a partnership. The relationship between the LLC members is defined by an operating agreement, similar to a partnership agreement. There are no different types of members in an LLC, no "general" or "limited" members, like a partnership. 04 of 09 What is the Difference Between an LLC and a Corporation? There is a lot of confusion out there about LLCs and corporations; in fact, sometimes LLCs are mistakenly referred to as "Limited Liability Corporations." But an LLC is not a corporation; the two business types have totally different ownership structures and forms. An LLC is simpler to form than a corporation because no by-laws or corporate charter is required. But that doesn't mean that the LLC isn't carefully watched by state and federal agencies to make sure it is being operated separately from the owners' personal financial and tax lives. 05 of 09 Two Types of LLC's - the Domestic LLC vs. the Foreign LLC - Explained If you form an LLC in a state, you are by default forming a domestic LLC. But what if your LLC does business in several states? Then you'll want to know about the foreign LLC. After you register an LLC in one state and then register the same business in another state, the second registration is as a foreign LLC. 06 of 09 How Do I Start a Limited Liability Company? Here are the steps involved in starting an LLC are fairly simple. You will need an Employer ID (business tax number) for the business. You'll need to register the LLC with your state, And you'll need to create an operating agreement. 07 of 09 How Does an LLC Pay Business Income Taxes? The IRS doesn't recognize an LLC as a taxable business type, so it allows LLC's to pay income taxesas standard business types. If the LLC has only one owner, it pays income tax the same way as a sole proprietorship, using Schedule C on the owner's personal tax return to calculate income and expenses and find the business net income. If the LLC has more than one member, it pays income tax like a partnership, using a partnership tax return (Form 1065) and giving the individual partners a Schedule K-1 to add partnership income to their personal tax return. 08 of 09 What Other Taxes Does a Limited Liability Company Pay? LLC's must pay the same taxes as other types of businesses, including income taxes, sales taxes, and property taxes. The LLC owners (members) must pay income taxes on the profits of the business. This article provides more details on all the types of taxes an LLC business must pay. 09 of 09 Dispelling Myths about Limited Liability Companies Since LLCs are fairly new in the business world, there is still a lot of confusion about them. Many business experts and attorneys shy away from the LLC form because of these mistaken beliefs. For example, it's not true that a corporation is somehow "safer" from liability than an LLC, but it's true that LLC's are not tax entities (see above). And it's certainly not true that LLC's are only for small businesses. Some of the largest businesses in the world are LLC's.