llc tax form

Limited Liability Company Definition: A LLC offers similar benefits to an S Corporation; full protection against personal liability without a corporate-level tax. Additionally, a LLC requires fewer corporate formalities than an S Corporation. Over the past few decades, the LLC has risen in popularity, becoming the entity of choice for many small business owners and entrepreneurs.

  • Owners have limited liability protection Owners taxed directly on corporate profits (like an S Corporation)
  • Fewer corporate formalities than an S corporation No limit on the number of owners
  • Flexibility to offer fringe benefits is limited compared to C Corporations
  • More limited legal history than Corporations
  • May not be treated with as much credibility in the marketplace
  • Does not allow preferred stock

*Corporation status may be required to obtain future business licenses in particular industries.

Limiting Personal Liability:

A LLC Corporation, like a Corporation, protects owners and managers from exposure to the liabilities, debts and obligations incurred by their business. In every state except Massachusetts, one person may own all of the interests in a LLC and act as the corporation’s only employee while still maintaining protection from personal liability. Exceptions to Limited Liability

Protection: A LLC takes out a loan, and someone within the corporation personally guarantees the loan. Such personal guarantees are usually required when a LLC is undercapitalized and/or has not established a credit history. State and federal governments can hold the LLC employee who is responsible for reporting and paying corporate taxes personally liable for unpaid taxes or penalties that come as a result of not paying taxes. Normally, the party burdened with personal liability is known as the “Tax Matters Member.”

Managers of a LLC can be found personally liable for breach of duty that they owe to the LLC. Managers have a “duty of care” to act responsibly when performing LLC duties. Generally, if managers carry out their responsibilities designated to them in the LLC Operating Agreement, they will not be found in breach of their duty of care. Piercing the LLC Veil: In certain limited instances, creditors or litigants can attempt to impose personal liability on principals in a LLC by claiming that the LLC is a sham, a device created merely to defraud creditors, or is being run as a sole proprietorship (e.g., there has been a commingling of LLC and individual property).

The process of imposing individual and personal liability is referred to as “piercing the corporate (or LLC) veil” or “disregarding the corporate entity.” Ordinarily, a party seeking to pierce the LLC veil will have a heavy burden in attempting to persuade the courts to disregard the LLC as an entity. Members: Unless otherwise defined in the LLC Operating Agreement, members own a pro-rata share a LLC, and therefore have rights to a pro-rata share of a LLC’s profits and losses.

Members may be individuals or separate legal entities. Managers: Members may elect a manager to run the LLC. Managers may be members or nonmembers, and can be individuals or separate entities. Meetings: LLCs are not required to hold annual member meetings or manager meetings. However, a LLC may elect to mandate such meetings in its Operating Agreement. Voting at meetings may be allowed by proxy.

Member Reports: LLCs are not required to distribute annual reports to members updating the status of the business. LLCs must make company information available to members upon request. Further, members of a LLC may mutually agree to mandate distribution of annual reports in the LLC Operating Agreement. State Reports: Many states require LLCs to file annual (in some states biannual) reports with the state, updating the status of the managers, members and the LLC in general. LLCs can do business under additional fictitious names if they file for a “DBA” in their state or county. (If you are interested in filing a DBA, please inquire when placing your order.)

LLC ownership interests are taxed like interests in a partnership, but may be issued like shares in a corporation. For example, the founders of a LLC may hold 10 membership interests each (as payment for services rendered to the LLC) and investors may later be offered the opportunity to buy single membership interests for $5,000 each. While there is no real equivalent to the preferred stock of a C Corporation with a LLC, members in a LLC can agree to distribute to different members a disproportionate share of profits and losses, including a disproportionate share of profits and/or losses from different revenue streams.

With a LLC, members can elect to have it taxed as a corporation or a partnership. By default, a single member LLC will be taxed as a partnership If the LLC is taxed as a partnership, LLC profits will pass through directly to the members without being taxed on the entity level. The LLC will have to file an annual report with the IRS stating how much the each member earned or lost. Each member will then report their earnings or losses from the LLC on their individual tax returns.

In some instances, a LLC may want to elect to be taxed like a C Corporation (see C corporation page on Tax Implications and Fringe Benefits). According to the IRS, members of LLCs are subject to self-employment taxes. If you are an LLC member, you must pay self-employment taxes on your share of the profits if any one of the following conditions apply:

You work more than 501 hours during the LLC tax year . Your LLC offers professional services in the areas of consulting, health, law, engineering, architecture, accounting or actuarial science. You are allowed to execute contracts for your LLC With the current self-employment tax rate at 15.3 percent, many business owners choose to form an S corporation rather than an LLC. In an S corporation, only shareholders are required to pay self-employment taxes on money paid to them as compensation for services.