A Limited Liability Company (LLC) is a form of business entity which represents a second attempt (in addition to the "S" corporation) to combine the "limitedliability" feature of the corporation with the tax advantages of the partnership. LLCs are a relatively new form of business entity. Wyoming enacted the first LLC statute in 1977 and, as of this writing, LLC statutes are in effect in all fifty states.

Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit "single member LLCs, those having only one owner.

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

Classifications

The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file as a corporation, partnership or sole proprietorship tax return.

An LLC that is not automatically classified as a corporation can file Form 8832 to elect their business entity classification. A business with at least 2 members can choose to be classified as an association taxable as a corporation or a partnership, and a business entity with a single member can choose to be classified as either an association taxable as a corporation or disregarded as an entity separate from its owner, a "disregarded entity. Form 8832 is also filed to change the LLC"s classification.

Effective Date of Election

The election to be taxed as the new entity will be in effect on the date the LLC enters on line 8 of Form 8832. However, if the LLC does not enter a date, the election will be in effect as of the form"s filing date. The election cannot take place more than 75 days prior to the date that the LLC files Form 8832 and the LLC cannot make the election effective for a date that is more than 12 months after it files Form 8832. However, if the election is the "initial classification election, and not a request to change the entity classification, there is relief available for a late election (more than 75 days before the filing of the Form 8832).

Organizational Formalities. The formation of an LLC is similar to the formation of a business corporation -- by filing Articlesof Organization with the Secretary of State. The Articles must include basic information regarding (1) the name and addressof the LLC and its registered agent, and (2) its period of duration, for example, 10 to 35 years, although most states nowpermit perpetual duration.

The Articles can also include provisions regarding (A) the management of the LLC by all members (the owners) or certain persons (who can, but need not be members), known as "managers," a term similar to corporate directors, (B) limited liability of its members and managers, and (C) whether less than a unanimous vote of the members is required to dissolve, sell or merge the LLC or amend its governing documents (Articles of Organization and Operating Agreement). Some states still have statutes requiring an LLC to have two or more persons as members at the time that it is formed, but most states now allow single-member LLCs.

Operating Agreement. The LLC must also adopt an Operating Agreement that describes the rights and obligations of the members and how the LLC will be operated. The Operating Agreement is similar to a partnership agreement and somewhat similar to corporate bylaws.

Federal Tax Employer Identification Number. A federal tax Employer Identification Number should be obtained, as well as possible permits and licenses, depending upon the activities of the LLC.

Limited Liability. Similar to a corporation, the owners ("members") of an LLC have "limited liability."

Income Taxation. The LLC usually attempts to avoid corporate taxation. For LLCs formed prior to January 1, 1997, it was necessary to carefully structure the LLC in order to avoid the characterization by the Internal Revenue Service that the LLC was so similar to a corporation that it should be taxed as a corporation. These objectives may still be important for purposes of state income taxation, and so they will be described below. However, effective January 1, 1997, the Internal Revenue Service adopted new regulations which, for federal income tax purposes at least, abandons the old "four-factor" test and allows most LLCs to be taxed like a partnership or a Subchapter S corporation.