You can choose from several forms of legal organization when establishing a business. The entity you select will influence the taxes that will be due and owner liability, as well as determine the way you report business transactions to the Internal Revenue Service (IRS).
A limited liability company (LLC) is an option many business owners consider due to the flexibility and benefits it offers. An LLC is an entity which is separate from the person or company who owns it. The LLC can obtain a federal identification number from the IRS as well as a state identification number. Bank accounts, credit card accounts, and business transactions can all be undertaken with this business identification rather than the LLC owner’s (or member’s) identifying numbers. This separation creates limited liability which provides a level of financial and legal protection similar to that of corporations.
Corporations can be expensive to establish, whereas an LLC is generally more affordable. The LLC combines the benefits of this level of personal protection with the flexibility of a sole proprietorship or partnership. Unlike corporations, double taxation is not an issue with an LLC.
Since LLCs are established by state statutes, the IRS has not created a new tax form for income tax filing. When a business decides to become an LLC, it must be classified by filing the appropriate form with the IRS. A disregarded entity is the default filing status for a single member LLC. When there are at least two members, the LLC can be a partnership (default) or Corporation (Form 8832 must be filed).
To learn more about this business entity, visit the IRS website.