A limited liability company (LLC) is a hybrid business structure created under state law. The LLC is a hybrid entity because it generally provides limited liability protection similar to that of a corporation and has pass-through tax treatment similar to that of a partnership or sole proprietorship.
LLC Formation & Management Structure
An LLC is formed by filing the Certificate of Formation with the relevant state authority. Owners of the LLC are referred to as LLC members. Management of the LLC is vested in either an LLC Manager(s) (i.e., Manager-managed LLC) or its members (i.e., Member-managed LLC).
The ownership, management, and operations of the LLC should be conducted according to the terms outlined in the operating agreement. The LLC operating agreement is a governing document entered into by the LLC members and managers.
Not every state requires an LLC to have an operating agreement; however, it is highly recommended that LLCs have an agreement, even in cases where the LLC has only one member.
Federal Tax Treatment
For U.S. federal tax purposes, the LLC is a “domestic eligible entity,” which provides greater tax flexibility. An LLC can, within certain limitations, file an election to be taxed differently than its default tax treatment.
An LLC with one member is, by default, a disregarded entity for federal tax purposes. An LLC with more than one member is, by default, a partnership for federal tax purposes.
An LLC can file Form 8832 (Entity Classification Election) to elect corporate tax treatment. If the LLC meets specific requirements, it can also file Form 2553 (Election by Small Business Corporation) to be taxable as an S corporation.