Why LLCs are Gaining Notice

A popular development in the world of business structures is the limited liability company (LLC). As the name implies, LLCs are intended to limit the liability an owner assumes, which typically consists of the amount invested in the business, along with any personal guarantees also made.

LLCs are also attractive because the administrative requirements tend to be less rigorous than with other corporate structures. For example, not all states require LLCs to file annual reports. You may also be surprised to learn that the federal government doesn’t recognize this business structure. Instead, each state establishes its own regulations.

This means that the LLC itself isn’t taxed at the federal level. For federal income taxes, most LLCs can choose to file as a corporation, partnership or sole proprietorship — even if they’re not required to convert to these structures. Profits or losses then pass through to each member (or owner), who report them on their individual income tax returns.

Some LLCs are automatically classified as corporations for federal taxes. And some states do tax LLC income. Because members are considered self-employed, they will pay self-employment Medicare and social security taxes. Finally, certain businesses, including banks, usually cannot structure themselves as LLCs.

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