Choosing an LLC as a Form of Doing Business

A limited liability company (LLC) is a business entity separate from its owners. The major advantage is that it allows owners to participate in the management and to take advantage of the pass-through taxation while limiting their liability for debts or the business. LLC members have limited liability that is usually only common in corporations.

A single member LLC is taxed as a sole proprietorship by default; an LLC with two or more members is taxed as a partnership by default. Either LLC can elect to be taxed as a corporation.

The other attributes of the LLC usually will be determined by how the LLC is taxed. An LLC taxed as a corporation follows the corporation rules; an LLC taxed as a sole proprietorship follows the sole proprietor provisions; and an LLC taxed as a partnership follows the partnership rules. For example, an LLC taxed as a sole proprietor will not issue a Form W-2 to the single member for services provided, because a sole proprietor cannot issue a Form W-2 to himself or herself. The same is true for an LLC taxed as a partnership; members will not receive a Form W-2 from the partnership. However, an LLC taxed as a corporation will issue a Form W-2 to a member who provides services.

An LLC is formed under the state where the business is conducted. An LLC's Articles of Organization usually define who will be responsible for managing the company. Liquidation of the LLC will depend on how the entity is taxed.