A limited liability company, or LLC, is a business entity created under state law that combines characteristics of both a corporation and a partnership. Like a corporation, the owners of an LLC are generally not personally liable for company debts. Like a sole proprietorship or a partnership, an LLC has operating flexibility and is, by default, a “pass through” entity for tax purposes. This means that the LLC does not pay taxes on its profits, but instead, profits and losses are “passed through” to the owners, who must then pay tax on their share of LLC income.

What are the differences between an LLC and a corporation?

Although an S corporation shares many of the same tax characteristics as an LLC, an LLC has more flexibility and fewer restrictions on ownership than does an S corporation. An S corporation must not have more than 100 shareholders, all of whom must be U.S. citizens or legal residents. An S corporation is also subject to more formalities, such as holding annual meetings and keeping corporate minutes. On the other hand, LLCs generally are not required to hold formal meetings, but an LLC owner may be subject to higher self-employment taxes than a comparable S corporation owner. That is because an S corporation owner is required to pay self-employment tax only on salary, but not on dividends from the corporation.

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