The LLC formation is a business formation that is recognized in all 50 states, but is not recognized at the federal level for tax purposes. A LLC formation is not a corporation of a partnership; it is a hybrid of the two. LLC formations combine the best features of partnerships and corporations, although you do not get all of the benefits. While some people might call a LLC a limited liability corporation, the correct terminology is a limited liability company.
In a LLC the owners of the LLC are not referred to as owners, shareholders, or partners, they are called members. With the LLC formation there is no limited to the number of members they LLC can have. The members of the LLC can be individuals, corporations, or even other LLC’s. The one thing that you need to be aware of is the formation of LLC does not guarantee that the LLC will be around forever. The reason for this is the LLC formation is dissolved once one member dies or undergoes bankruptcy, whereas a corporation stays in business forever.
When forming your LLC many people often wonder if there is a specific state, you should use to form your LLC. The best LLC formation state is Delaware and Nevada. Most attorney’s like Delaware because it is a business friendly state, but Delaware also allows you to form a multiple series LLC. Nevada is another favorite state because they do not have a corporate income tax in the state. One thing you want to be careful of when forming a LLC in a different state is the legalities of doing this, even if your use a LLC formation company. Most LLC formation companies are going to do what is in your best interest, such as forming your LLC in the state that you will be doing business in, but others will take advantage of your ignorance, so be careful when using them. For example, in Nevada you can be on your way to income tax evasion if you do not properly set up your LLC in the state.
If you decide to go with the LLC formation for your business your business is going to have the liability protection of a corporation because the LLC exists as a separate entity like a corporation does. This means that members of the LLC are not going to be personally responsible for any business debts, unless they have signed a personal guarantee. Forming an LLC can be a bit complicated because of the paperwork that is required, forming a partnership or a sole-proprietorship requires less paperwork.
Another benefit of forming a LLC is the flow through taxation. When forming a LLC you will need to classify whether your LLC is a sole-proprietorship, partnership or corporation for federal income tax purposes based on the criteria that is set forth by the IRS. Most members that choose the LLC formation for their business do not choose to classify their LLC as a corporation for tax purposes because of the double taxation that corporations face, which is paying individual income taxes and corporate income taxes on the same income. If you elect to be taxed as a partnership or a sole-proprietorship your business losses, profits, and expenses are going to flow through the company to each individual member.
