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A limited liability company (LLC) has the liability protection of a corporation but the
tax status of a partnership. In other words, while you get liability safeguards similar
to those of a corporate shareholder, you pay taxes on the personal rate on your
share of the profits or use the loss to offset other income.
While an LLC has many of the same characteristics as an S corporation or a limited
partnership, it is, in many cases, more flexible. For example, it is possible to use an
LLC: to bypass the restrictions on S corporation ownership, to allocate profits
differently from ownership interests, or to avoid the general partner's personal liability
in a limited partnership.
Various states have different sets of restrictions, so it is advisable to check with your
state department of taxation first to find out the applicable state laws and if your
company would qualify to be an LLC. It's also a good idea to speak with your
accountant or tax advisor.
Filing to form an LLC can be extremely complicated, and the paperwork needs to be
completed meticulously, so you probably want to hire an attorney to help you. You
need to follow the state rules that govern formation of an LLC in your state, and file
the proper forms with the correct state bureau. You also will need to observe IRS
guidelines in your LLC operating agreement (governing the relationships and
responsibilities of the LLC owners) so that you qualify for taxation as a partnership
rather than a corporation.
Advantages
- Liability protection similar to a corporation, but tax status of a partnership
- Potentially provides greater flexibility than an S corporation or a limited
partnership
Disadvantages
- Extremely complicated filing procedure that requires strict adherence to
state and federal guidelines
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