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Similar to corporations, owners of limited liability companies have limited personal liability for the debts and actions of the LLC but can be taxed as either a corporation, partnership, or, if owned by one person, as a so-called disregarded entity. Owners of LLC’s are called “members”.
As with corporations, each member’s liability is limited to their financial investment. To form an LLC, one must register under a state LLC statute, file articles of organization, and comply with state requirements that are a condition of its limited liability status. There are many things that must be considered when contemplating LLC status. Some questions to consider include the number of owners, the desirability of limited liability, whether losses are expected in the initial years, other sources of income to the owners, simplicity of formation, and flexibility of structure. Usually, owners form their businesses as LLC’s because they want the tax-transparency of an S corporation and the flexibility of a partnership with the limited liability of a corporation.
Due to complexities in every situation, please be sure to contact your tax advisor when making entity selection.