OK lets talk about LLC’s; what they are and what they are not. The entire notion of LLC’s began about 20 years ago, in Arizona, the first state to enact legislation establishing LLC’s as an alternative to Corporations.
Corporations and LLC’s are both for the purpose of allowing business owners “Limited Liability”. That means, generally, that their personal assets are not subject to business creditors claims, in such matters as personal injury lawsuits and bankruptcies. It’s basically an inducement for business owners to start businesses, create jobs, that sort of stuff, but limiting their personal exposure to the capital they’ve used to fund the business.
Corporations were thought to be unnecessarily cumbersome in the small business environment, requiring Boards of Directors, annual meetings, etc, that makes a lot of sense for large businesses, but not so much for the ma and pa businesses we see everywhere. Thus, legislation has been passed creating the LLC as an alternative for smaller operations, where the bureaucracy and paperwork required of Corporations is not required.
That’s what an LLC is.
What its not, is it’s not a tax status. Many writers of tax articles continue to get this wrong, using phrases like “Taxed as an LLC”. That means nothing.
LLC’s can be taxed as a:
Thus, we say that a business is “An LLC taxed as a sole proprietorship”, or “An LLC taxed as an S-Corporation”, etc.
So, try and not be confused about what an LLC is not. Its not a tax status, but it is a state-legislated limited liability entity intended to promote the formation of businesses.