S corporations may not specially allocate profits, losses and other tax items under US tax law. A limited liability company with multiple members that elects to be taxed as partnership may specially allocate the members' distributive share of income, gain, loss, deduction, or credit via the company operating agreement on a basis other than the ownership percentage of each member so long as the rules contained in Treasury Regulation (26 CFR) 1.704-1 are met.An LLC can elect to be taxed as a sole proprietor, partnership, S corporation or C corporation (as long as they would otherwise qualify for such tax treatment), providing for a great deal of flexibility. It combines the simplicity and flexibility of an LLC with the tax benefits of an S-corporation (self-employment tax savings). Some commentators have recommended an LLC taxed as an S-corporation as the best possible small business structure. After electing corporate tax status, an LLC may further elect to be treated as a regular C corporation (taxation of the entity’s income prior to any dividends or distributions to the members and then taxation of the dividends or distributions once received as income by the members) or as an S corporation (entity level income and loss passes through to the members). Under partnership tax treatment, each member of the LLC, as is the case for all partners of a partnership, annually receives a Form K-1 reporting the member's distributive share of the LLC's income or loss that is then reported on the member's individual income tax return.Īn LLC with either single or multiple members may elect to be taxed as a corporation through the filing of IRS Form 8832. The default tax status for LLCs with multiple members is as a partnership, which is required to report income and loss on IRS Form 1065. If there is only one member in the company, the LLC is treated as a “disregarded entity” for tax purposes, and an individual owner would report the LLC’s income or loss on Schedule C of his or her individual tax return. federal income tax purposes, an LLC is treated by default as a pass-through entity. Similarly, the phrase “unless otherwise provided for in the by laws” is also found in all corporation law statutes but often refers only to a narrower range of matters. State statutes typically provide automatic or "default" rules for how an LLC will be governed unless the operating agreement provides otherwise. The phrase "unless otherwise provided for in the operating agreement" (or its equivalent) is found throughout all existing LLC statutes and is responsible for the flexibility the members of the LLC have in deciding how their LLC will be governed (provided it does not go outside legal bounds). Limited liability company members may, in certain circumstances, also incur a personal liability in cases where distributions to members render the LLC insolvent. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor’s share of distributions, without conferring on the creditor any voting or management rights. Membership interests in LLCs and partnership interests are also afforded a significant level of protection through the charging order mechanism. So long as the LLC and the members do not commingle funds, it would be difficult to pierce its veil. However, it is more difficult to pierce the LLC veil because LLCs do not have many formalities to maintain. LLC members are subject to the same alter ego piercing theories as corporate shareholders. It is often more flexible than a corporation, and it is well-suited for companies with a single owner. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation.
An LLC, although a business entity, is a type of unincorporated association and is not a corporation. Often incorrectly called a "limited liability corporation" (instead of company), it is a hybrid business entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are).
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