A limited liability company offers limited liability asset protection. This type of asset protection means that the liability is limited to whatever assets the owner has invested in the LLC, essentially, only all business assets. These business assets can include, but are not limited to, initial, investment, or retained earnings.
Because the liability is limited to what the owner of the LLC has in the business, it provides that the personal assets of the owner are protected. This means that in the case of a lawsuit, the LLC is the entity that would be sued.
How does taxation work in an LLC?
The owners of a limited liability company enjoy the flexibility of being able to choose how the LLC is treated as a taxable entity. An LLC enjoys pass through taxation where the company’s net profits/income is passed through the legal entity and onto the personal tax of the member(s). A single member LLC can be taxed as a sole proprietor. A multi-member LLC can be taxed as a partnership. The members can elect to be taxed as a C-corporation or an S-corporation.
As a sole proprietorship, any taxes incurred by the LLC will be passed on to the members’ personal IRS tax. As a partnership, any taxes incurred by the LLC will be passed to those members’ in the business. This means that the members would be taxed as a regular partnership and all members handle the business related taxes on personal returns.
As a C-corporation, the LLC is taxed as a business entity and the business taxes are not passed through to the members’ personal taxes. This method allows for more savings opportunities through business tax deductions. Moreover, it separates a business owner’s personal assets and his/her business assets. As an S-corporation, all the taxes from the business activities are passed to the personal taxes of the LLC members. This is very similar to a sole proprietorship. This method prevents double taxation and allows the LLC members to classify themselves as employees.