Introduction
I previously wrote about the basics of how to start a business. Limited Liability Company (LLCs) are very popular for businesses, especially smaller ones. LLCs are a hybrid between partnerships and corporations in that the owners (called "members") are more like partners (versus shareholders) but still have the liability protections of larger corporations. Previously, business owners who entered to partnerships did not have the same liability protections.
Basics of LLCs
LLCs are also popular because business owners can customize them almost anyway they please. Although the default relationship between LLC members is a partnership, a skillfully crated operating agreement (the document that governs the LLC) can create a corporate like structure of "units" similar to shares in a corporation. Membership units can have different rights and preferred statuses associated with them similar to shares.
Another advantage to an LLC is choosing profit-sharing models. As a default, LLCs are pass-through entities that are not recognized by the IRS. This means that members report their income on their personal income taxes. However, LLCs can choose to be taxed as a corporation, specifically an S-Corp. This is why business owners don't actually have to choose between an S-corp and an LLC because the LLC can be both. Many people incorrectly believe that an S-Corp is a type of corporation. In reality, it is actually just a tax designation can be used by both corporations and LLCs. LLCs typically want an S-corp status if they are single member ...