Limited Liability Companies


The limited liability company (LLC) is, for federal income tax purposes, a pass-through entity like a partnership or S corporation, but it includes the limited liability of a corporation.

LLCs are created by statute and vary from state to state. The operating agreement sets forth the relationship of its members (owners) and governs how the LLC will be operated, allocation of earnings, capital contributions and distributions. The formalities found in the corporate business organization, like directors meetings, written minutes, etc., may not be required.

Federal Income Taxation of LLCs

Federal income tax law4 provides some flexibility as to how an LLC and its members are taxed:

Single member LLC:

An LLC with a single member by default is "Disregarded as an entity separate from its owner...". For LLCs with a single individual member, this means that income and expenses are generally reported on the individual's personal return on Schedule C, E, or F. An LLC with a single individual member may elect to report income and expenses as a corporation. For LLCs with a single corporate member, income and expenses are typically reported on the corporation's return.

Multiple member LLC:

An LLC with two or more members (individual or corporate) by default reports income and expenses as a partnership. Such an LLC may elect to report income and expenses as a corporation.

State income tax law can vary and does not necessarily follow federal law.