Limited liability companies are so named because its owners have limited
personal liability for the debts and actions of the LLC. LLCs enjoy the benefit
of pass-through taxation, where only the individual partners’ incomes are
taxed. This is in contrast to the double taxation that corporations have,
where both the profits of the corporation and the incomes of its owners and
shareholders are taxed.
LLCs do not fall under any unique tax classifications; the IRS simply
classifies LLCs under the three tax entity classifications that it uses for
business taxpayers: corporation, partnership, or sole proprietor.
If there are two or more members in your LLC, then you can elect to be
taxed either as a corporation or as a partnership. To elect to be taxed as a
corporation, you need to fill out Form 8832. If you don’t fill out this form,
your multi-member LLC will automatically be classified as a partnership.
If you are the sole owner of your LLC, then you can elect to be classified as
a corporation or as a disregarded entity which is taxed as a sole proprietor
for income taxes. Again, you need to fill out Form 8832 to elect for your
single member LLC (SMLLC) to be classified as a corporation.
There are some issues that you may be interested in becoming aware of
regarding LLC formation. For instance, if you intend to convert an existing
business into an LLC, the conversion may result in capital gains and your
employment tax wage bases may be affected. Also, forming an LLC affects
the amount of losses that you can deduct. The amount that you can deduct
is limited because of your limited liability in your LLC’s debts. Another factor
which may limit the amount of loss you can deduct is the Passive Activity
Limitation.