A limited liability company  is a relatively new form of entity that combines the advantage of a partnership with the advantage of a corporation's limited shareholder liability, even if the owners participate in the management of the company. (abbreviated by L.L.C. or LLC).  The owners have limited personal liability for the actions and debts of the company. 

An LLC can have one or multiple owners. An "L.L.C" with multiple owners may choose, to be treated for  U.S. federal taxation purposes as a Partnership or sometimes an S Corporation with the benefit of pass-through taxation.

An LLC can elect to be Member-Managed or Manager-Managed.

A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.

Members may include individuals, corporations, other LLCs and foreign entities.  There is no maximum number of members.

Member-Managed:  Choosing to operate by member management creates a flat member or partnership structure. Choosing manager management creates a two-tiered management structure potentially convertible into a corporation.

Manager-Managed: Managers are the individuals who are responsible for the maintenance, administration and management of the affairs of an LLC. In most states, the managers serve a particular term and report to and serve at the discretion of the members. Specific duties of the managers may be detailed in the articles of organization or the operating agreement of the LLC. In some states, the members of an LLC may also serve as the managers.

Owners

Owners are sometimes referred to as 'Members'. Unless the articles of organization or operating agreement provide otherwise, each governing person or member has an equal vote in the management of the LLC.

 Articles of Organization

LLCs are organized with a document called the "articles of organization,' or "the rules of organization" specified publicly by the state; additionally. You will have to file articles of organization with the Secretary of State and pay the required fees. Articles may be prepared by a lawyer or filed yourself.

Operating Agreement:

The operating agreement is a contract among the members of an LLC and the LLC governing the membership, management, operation and distribution of income of the company.  Although it is not required in many states to draft an operating agreement, it is advisable. It is much like corporate by-laws or partnership agreements.

Taxes

1. Tax forms are complex.

2. As a partnership, the entity's income and deductions attributed to each member are reported on that owner's tax return.

3. LLCs can lose their tax advantage without the partnership structure.

4. An LLC passively investing in real estate and owned by a single member would have its income and deductions reported directly on the owner's individual tax return on a Schedule E tax form.

5. And an LLC owned by a corporation--in other words, an LLC with a single corporate member--would be treated as an incorporated branch and have its income and deductions reported on the corporate tax return, creating double taxation.

6. For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to Publication 3402, Tax Issues for Limited Liability Companies (PDF).

7. To be treated as a corporation, an LLC has to file a Form 8832, Entity Classification Election (PDF), and elect to be taxed as a corporation.

8. If a Single Member LLC does not elect to be a corporation it will be classified by the IRS as a Disregarded Entity which is taxed as a Sole Proprietor for income taxes.

9. A multi-member LLC that does not so elect will be classified by the IRS as a partnership. 

10. If an SMLLC has or intends to have employees, the EIN rules are different. If there is or will be employment tax reporting, both the single member owner and the SMLLC will need an EIN (two EIN’s). If the SMLLC has already received an EIN for reasons set out in the above paragraph, then only the owner will need to file the SS-4 and be assigned an EIN.

11. After January 1, 2009, Notice 99-6 is obsolete and the SMLLC will be responsible for collecting, reporting and paying over employment tax obligations using the name and EIN assigned to the LLC.

Employer Identification Number (EIN)

If a SMLLC, whose taxable income and loss will be reported by the single member owner, nevertheless needs an EIN to open a bank account or if state tax law requires the SMLLC to have a federal EIN, then the SMLLC can apply for and obtain an EIN. If the SMLLC has no employees, it will not use this EIN for any federal tax reporting purpose.

 The IRS LLC’s information

You must file with the respective State to register the business.

See a comparison matrix between the different organizations

Advantages

1. Administrative paperwork: Much less administrative paperwork and record keeping is required than a corporation.

2. Number of Shareholders: No restriction on the number or nature of shareholders.

3.  Pass-through taxation: (i.e., no double taxation), unless the LLC elects to be taxed as a C corporation.  In other words you do not pay taxes as corporate income then again as personal income earned from the company.

4.  Limited liability: meaning that the owners of the LLC, called "members," are protected from some liability for acts and debts of the LLC, but are still responsible for any debts beyond the fiscal capacity of the entity.

5.  Separate entities: LLCs in most states are treated as entities separate from their members, whereas in other jurisdictions case law has developed deciding LLCs are  not considered to have separate juridical standing from their members.

6.  Flexible Profit Distribution: Limited liability companies can select varying forms of distribution of profits. Unlike a common partnership where the split is 50-50, LLC have much more flexibility.

7. No Minutes: Corporations are required to keep formal minutes, have meetings, and record resolutions. The LLC business structure requires no corporate minutes or resolutions and is easier to operate.

Disadvantages

1.  Franchise Tax:  A handful of states (such as  Alabama, California, Kentucky, New York, Pennsylvania, Tennessee, and Texas), levy a franchise tax or capital  values tax on LLCs. (Beginning in 2007, Texas has replaced its franchise tax with a "margin tax".) In essence, this franchise tax is the "fee" the LLC pays the state for the benefit of limited liability. The franchise tax can be an amount based on revenue, an amount based on profits, or an amount based on the number of owners or the amount of capital employed in the state, or some combination of those factors, or simply a flat fee, as in Delaware.

2.  Financing:  It may be more difficult to raise business financing for an LLC as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual IPO. One possible solution may be to form a new corporation and merge into it, dissolving the LLC and converting into a corporation.

3.  Disregarded entity:  Some states do not fully treat LLCs in the same manner as corporations for liability purposes, instead treating them more as a disregarded entity, meaning an individual operating a business as an LLC may in such a case be treated as operating it as a sole proprietorship, or a group operating as an LLC may be treated as a general partnership.

4.  Opeating agreement:  Although there is no statutory requirement for an operating agreement in most states, members who operate without one may run into problems.

5.  Corporate Governance:  Unlike corporations, they are not required to have a board of directors or officers.

6.  Title confusion:  The principals of LLCs use many different titles -- e.g., member, manager, managing member, managing director, chief executive officer, president, and partner. As such, it can be difficult to determine who actually has the authority to enter into a contract on the LLC's behalf.

7.  Foreign jurisdiction:  Taxing jurisdictions outside the US are likely to treat a US LLC as a corporation, regardless of its treatment for US tax purposes, for example if a US LLC does business outside the US or a resident of a foreign jurisdiction is a member of a US LLC.

8.  Limited Life: Corporations can live forever, whereas a LLC is dissolved when a member dies or undergoes bankruptcy.

9.  Going Public: Business owners with plans to take their company public, or issuing employee shares in the future, may be best served by choosing a corporate business structure.

10. Alternative Minimum Tax:  Individual alternative minimum tax consequences may arise.