This description is general, and will vary based on state law.
The LLC type of business entity was established in 1980. An LLC can be made up of corporations, individuals, trusts, or other partnerships. To form an LLC, two or more individuals and/or entities (members of the LLC) enter into an operating agreement and file a Certificate or Articles of Organization with the state of their choosing. The legal structure of an LLC varies by state.
LLCs are taxed at the individual income tax rate, similar to sole proprietorships, partnerships, and S corporations. LLCs are hybrid entities that combine the flow-through attributes of partnerships with the corporate characteristic of limited liability.
As in a corporation, an LLC offers its members limited liability. Members of an LLC are only at risk to the extent of their investment; they cannot be sued for the LLC’s actions. The LLC’s board of managers, elected by the LLC members, is responsible for running the business. The board of managers can be one or more individuals and are referred to as the managing member(s).
Like general partners in a partnership, LLC members may participate in the management of the LLC. However, unlike limited partners, participation in management will not cause a member to lose their limited liability protection.
The LLC operating agreement can provide for an allocation of most items of income and deduction in any manner in which the members see fit. LLCs are required to file annual tax returns. For a single member LLC, income and expense is reported on the member’s personal IRS Form 1040 with the business income and expense reported on a schedule F (farming income), a schedule E (rental real estate income), or a schedule C (all other types of businesses).
Multiple member LLCs are generally classified a partnership for IRS purposes and file an IRS Form 1065, U.S. Return of Partnership Income. An LLC can elect to be classified as an association, taxable as a C corporation or as an S corporation. An LLC can later elect to change its classification. An LLC that elects to file as a C corporation will file IRS Form 1120, U.S. Corporation Income Tax Return. An LLC that elects to file as an S corporation will use IRS Form 1120S, U.S. Corporation Income Tax Return. Each member of a multiple member LLC receives an IRS Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc. that reports their share of the net profit or loss generated by the business, as well any other activity that has a tax consequence. Each member transfers the information on the Schedule K-1 form to their personal tax return and is taxed at their respective personal rate.
An LLC may have any number of members, and any type of members (individual or other entity). The duration or life of an LLC is limited; it may be terminated or dissolved when a member dies, withdraws, is expelled, or becomes bankrupt.
Documentation
Documentation for an LLC includes:
- Articles of incorporation
- Operating agreement
- Borrowing resolution
- Certificate of good standing
The signature block, individuals’ names and titles should be styled consistent with the borrowing resolution.
Because LLC members are not directly liable, a separate guarantee agreement is necessary to acquire the individual’s personal liability for the debt to the borrower.
Last updated November 25, 2016
