Because a limited liability company is not a corporation, it does not have stock. Instead of paying dividends, an LLC distributes its entire profit or loss annually to its members. If the company is owned by another entity, such as a corporation or another LLC, the parent company receives 100 percent of the company's profit or loss as ordinary income. For an individual, it is treated as self-employment income. If there is more than one member, the company provides Schedule K-1 to each member outlining her share of the profit or loss for that year.
A limited liability company is an organizational structure that separates company owners' personal assets from those of the business to protect the assets if a successful litigant or a creditor obtains a judgment against the company. It has some features of a corporation and some features of a partnership. An LLC is governed by state law, and each state has slightly different laws, rules and regulations for LLCs. Forming an LLC is a simple process that involves completing an articles of incorporation form and paying the state LLC filing fee.
Read More: Does an LLC Always Have Members?
An LLC can have one or more owners, called members. A member can be an individual or an entity such as a corporation, partnership or another LLC. Each member makes a capital contribution to the company to purchase a membership interest, and the membership interest represents the member's ownership percentage of the company. The company maintains an ongoing record of each member's capital account balance as members contribute capital or make withdrawals. A membership interest usually represents a member's voting rights and the member's relative share of the company's profit and loss.
Most LLCs, even single-member LLCs, document the rules that the members agree upon for governing the company in a document called the operating agreement. States have few restrictions on how the company can organize and manage itself through its operating agreement. For example, an LLC can establish a methodology for distributing the company's profit or loss that's different from the relative value of each member's capital account.
An LLC does not pay any federal income tax. Instead, the company is required to distribute its profit or loss for the year directly to its members according to the methodology established in the company's operating agreement. If the parent company is a joint owner in a multi-member LLC, it and the other members receive a Schedule K-1 from the company, similar to a partnership. If the parent company is the sole owner of the LLC, the subsidiary LLC is disregarded for federal income tax purposes, and the distribution is treated as ordinary income to the parent company.
Steve McDonnell's experience running businesses and launching companies complements his technical expertise in information, technology and human resources. He earned a degree in computer science from Dartmouth College, served on the WorldatWork editorial board, blogged for the Spotfire Business Intelligence blog and has published books and book chapters for International Human Resource Information Management and Westlaw.