Limited Liability Companies (LLC)

There are several forms a company can take:

  • Sole Proprietorship - one person
  • Partnership - 2 or more
  • S-corp - multiple people, earnings and losses pass through to owners.
  • C-corp - earnings and losses stay within the company. Many rules and reporting requirements
  • LLC - can be any of the above

Corporate structure and operations

The first 4 company forms are well defined corporate structures. Going down the list the structures there is an increase in the separation of the investors from the company (with increasing financial protection) but with increasing complexity and regulations. 

An LCC is not a corporate form because it has very little definition. LLCs were devised to let entrepreneurs more flexibility in designing a company organization to meet their needs. LLCs can have some of the traits of any of the above in their operating guidelines. 

The IRS does not recognize LLCs!

As far the the IRS and taxes go, there is not such thing as an LLC. The LLC is considered a "disregarded entity." By default, the IRS  decides its tax treatment depending on the number of members . A single member LLC is taxed as sole proprietorship  while a LLC with more than one member is taxed a S-corp. This can be over-ridden by filing form 8832 to elect to be treated a particular corporate for for tax purposes. (This goes back to the flexibility issue). You can also change this election within limitations. A very unique advantage of the LLC is that it can elect to be taxed as S-Corporations or even a C – Corporation if it chooses.

While occasional investors may like an S-corp tax structure (real S or LLC-S election) because the initial losses can be reported on their taxes, serious investors prefer C-corps to separate their personal taxes from their investments. 

Bottom Line

Form an LLC to take advantage of the relaxed reporting rules, and organization flexibility. Then elect the tax status based on your unique requirements.

  • Just two of you putting up the money => S-corp
  • Have students or a high income founder => C-corp
  • You can always convert to a real C-corp if your future investors prefer.