What is an LLC?
A Limited Liability Company (LLC) is a type of business organization that is not directly subject to income tax. Instead, the income of the LLC passes through to its owners and is taxed to them at the tax rates applicable to them. It combines the pass-through federal tax treatment of a partnership with the liability protections of a traditional corporation.
The LLC business organization form is a construction of state law and every state in the United States has laws that permit a business to organize and operate as an LLC. An LLC is an appealing business formation because its owners, called members, have no personal liability for the obligations of the LLC (unlike a sole proprietorship).
An LLC has two principal charter documents:
(1) Certificate of Formation/Articles of Organization (the specific name depends on the state in which the LLC is formed).
A short document that is to be filed with the secretary of state in the state of organization which sets forth:
- the name of the LLC;
- its address;
- its agent for service of process;
- the term (which may be perpetual); and,
- whether the LLC will be governed by the members or by managers appointed by the members.
(2) Operating Agreement.
The Operating agreement specifies:
- how the LLC will be governed;
- the financial obligations of the members; and,
- how profits, losses, and distributions will be shared.
The foregoing is not intended to be, and should not be construed to be, tax advice. This website offers general answers to general questions based on information obtained from www.irs.gov and other publicly available information. Collaborative Fund cannot be held responsible for the results of any position taken on a tax return by any user of this site. Users should always obtain independent tax advice from a qualified tax professional to determine the tax consequences applicable to such user’s personal situation.
