How Does an LLC Work?

woman filing taxes

How many people are needed to form an LLC?

There is no rule that requires an LLC to have a certain number of members or to use specific titles such as President, Vice President, Secretary etc. However, the IRS does allow one-member LLCs (single member LLC) to qualify as a pass-through entity. 

How is an LLC managed?

An LLC may either be managed by its members (member managed) or managed by selected managers (manager managed). If the LLC is managed by its members, each member will have an equal vote in the company decision-making process based on their individual stake. If the members elect a manager or managers they will be in charge of the daily affairs of the LLC. 

If managers are not selected in the Articles of Organization the LLC will default into member management. 

What is the organizational structure of an LLC?

An LLC is owned by members. A member's ownership is represented by membership interest, which is either in a percentage or units reflected on a member certificate. 

How is a limited liability company (LLC) taxed?

After organization, by default the IRS will tax an LLC as a disregarded entity, however an LLC can elect to be taxed as an S corporation by filing Form 2553 or elect to be taxed as a C corporation by filing form 8832. 

LLCs are also subject to any franchise taxes imposed by the state. Franchise taxes are typically due annually, and the amount will vary by state. *California LLCs are subject to an annual minimum franchise tax of $800 per year. The first payment must be made within 3 months of forming your LLC. The state will send a bill to remind you to make this payment.