One of the most popular business entities today is the Limited Liability Company.

The LLC combines the flexibility and pass-through taxation potential of a partnership, while providing its members with the personal liability protection of a corporation.

The LLC is a distinct legal entity, capable of suing and being sued, much as a corporation is a distinct entity from its shareholders.

Contributors to an LLC are referred to as "members", and their involvement in the operations and management of the LLC will vary depending on the nature of the LLC.

There are three basic options for management of an LLC:

Member-Managed LLC

In a "Member-Managed" LLC, each of the members of the LLC will participate in the operation and day-to-day management of the LLC.

In this regard, a Member-managed LLC will function like a General Partnership, but with the limited liability of a corporation.

Manager-Managed LLC

Manager-managed LLC's turn over the day-to-day operations of the LLC to a professional "manager", who may either be a member of the LLC, or the n outsider to the company. The rest of the members of a Member-Managed LLC will act much like limited partners in a Limited Partnership - i.e. they will contribute capital but not management expertise.

Single-Member LLC

Since 2000, the State of California has recognized single-member LLCs as a legal entity.

Under the Internal Revenue Code, Single-member LLC's will be disregarded for Federal tax purposes, and the income must be reported on the Individual member's tax return.All assets and liabilities are treated as if they are owned by the individual member.

Single-member LLC's may be ideal for sole proprietors who wish to protect their personal assets from liability, but retain the same tax characteristics of a sole proprietorships.Also, they may be ideal for personal real estate holdings.

The LLC offers several key advantages over the corporation format:

(1) Pass-through Taxation Unlike the C Corporation, an LLC may be taxed as a Partnership.The possibility of double-taxation is eliminated in this LLC format—since no entity-level taxation takes place.

(2) Simplified Formalities Unlike corporations, LLC's have much fewer formalities to observe to maintain their integrity.The reduced paperwork often makes them ideal for small businesses or sole proprietors.

(3) Less Restrictions than an S Corporation The S" Corporation has a number of restrictions, including: the number and type of shareholders, as well as a number of accounting and tax restrictions that often work to the disadvantage of the share-holders.The LLC does not have most of these burdensome restrictions.

Who May not Use an LLC?

Unfortunately, not every business may form an LLC.

Businesses or professions that may only be practiced with a license, certification, or registration authorized under the Business and Professions Code, the Chiropractic Act, or the Osteopathic Actmay not organize as an LLC.

These businesses may only organize as Professional Corporations.

In addition, those companies engaged in the Banking, Insurance, or the Trust Company business may also not organize as an LLC.

Conclusion

If you are a sole proprietor or small business owner who has not taken any steps to protect your life's savings, you should consider the LLC format.For many businesses, the LLC provides flexibility and asset protection with a minimum of hassle.