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What is a Limited Liability Company (LLC)?
Many business professionals believe the LLC, the Limited Liability Company, presents a superior alternative to corporations and partnerships because the LLC combines many of the advantages of both. With an LLC, the owners can have the corporate liability protection for their personal assets from business debt as well as the tax advantages of partnerships or "S" Corporations. An LLC is similar to an "S" Corporation without the IRS restrictions. Basically the LLC and the Corporation offer the same asset protection and are similar in nature. The Limited Liability Company ( LLC) has become popular because it traditionally is the form of business structure used in Europe and Latin America.
The LLC was first introduced in the United States by the State of Wyoming in 1977 as a pass-through for taxation (similar to partnerships and "S" Corporations) by the IRS in 1988. With the recent inclusion of Hawaii, all 50 states and Washington, D.C. have now adopted some form of LLC legislation for both domestic and foreign (out of state) Limited Liability Companies. However, both the LLC and a Corporation offer the same asset protection and are similar in nature. What is the proper definition of a "disregarded entity"? Both the LLC and the Corporation are required to file taxes year end with the IRS, even if the company has had had "No Activity".
Many websites falsely tell you that the LLC is a "disregrded entity" misleading one to think that no federal tax form needs to be filed. “Disregarded” is an ambiguous statement. This does NOT mean you do not file a tax return.
Filing a Federal Tax Return with the IRS
IRS status of your LLC depends on the minimum number of members in the company. The IRS regards a "single member LLC as a sole propietorship and NOT a partnership. As a US citizen, you must file your corporate taxes for your LLC on your personal tax return using a "Schedule C" Note: Most accountants prefer not to file in this manner.)
To avoid this situation you will have to convert the LLC to a "C" Corporation using Form 8832 and then an "S" Corporation using form 2553 . An "S" Corporation is limited to US citizens filing a personal tax return. Since international clients do not file a personal tax return you will be required to convert the LLC to a “C” Corp. by filing an IRS form 8832.
Since the LLC offers the same asset protection as a “C” corporation, as a non US citizen, an LLC does not offer any advantages.
Advantages and Disadvantage of an LLC
Protection of personal assets from business debt
Profits/losses pass through to personal income tax returns of the owners
Greater flexibility in management and organization of the business
Delaware only requires the LLC to have one member.
The LLC does not have the ownership restrictions of an "S" Corporation
The IRS regards a single member LLC as a "Sole Propriertship"
As a single member LLC, you must elect to file a "Schedule C" as part of your personal tax return.
The LLC often has a limited life (not to exceed 30 years in many states)
Some states (not Delaware) require at least 2 members to form an LLC.
LLCs are not corporations and therefore do not have stock and the benefits of stock ownership and sales.
International clients not filing a US personal tax return, must file IRS Form 8832 and be taxed as a "C" corporation.
Filing a Limited Liability Company
When filing an LLC, the certificate must contain the words:
Limited Liability Company