2.05 Limited Liability Companies

Limited Liability Companies (LLCs) are a new kind of business entity created primarily for federal income tax purposes. In most cases, an election will be made to treat the LLC as a partnership, which allows deductions to be claimed directly by the partners. Many states now allow the creation of a single-member LLC, which is treated like a sole proprietorship.

The increasing popularity of LLCs has increased the need to consider the manner in which these companies are treated for other purposes. For example, the states are not always consistent in their treatment of LLCs for income tax purposes.1 There may be differences in the treatment of partnerships and sole proprietorships which make a single-member LLC a better or worse option. For example, a leasing company created for sales tax purposes may not work if incorporated as an LLC. Also, a single-member LLC incorporated in one state may not be treated the same in a state which does not allow single-member LLCs.

One problem in making these determinations is that LLCs are so new that many of these questions have not been considered.

  1. For example, Florida initially considered LLCs to be taxable as corporations.