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How to Incorporate - Limited Liability Company

Combines the operational flexibility and favorable tax treatment of partnerships with the limited liability feature of a corporation.

Advantages

Limited liability – a creditor may not seek satisfaction of any limited liability company debt against the personal assets of any member.
Tax advantage – the members each pay their share of tax on their share of profits avoiding double taxation of LLC profits.
Number (unlimited) and type of investors (can be individuals, LLCs, Corporations, Trusts, Partnerships) and there are no restrictions as to ownership unlike an S corp.
Non-transferable interest – a member may not transfer his voting interest without concurrence of all remaining members.
Management – The management of the business and affairs of an LLC may be conducted by the members or, if the members agree, may be vested in a manager or managers.
Continuity of life – the term of existence must be stated in the articles of organization. In some states perpetual duration is accepted.
Contributions – members contribute in the form of cash, property, services, or promises to contribute cash or property or to perform services.
Can convert to a Series LLC (instead of using multiple LLCs) to segregate assets and liabilities.

Disadvantages

Your state may impose income taxes on LLCs even though the IRS doesn’t.
Converting an S or C Corporation to an LLC may carry too heavy a tax price.
There is a lot of bad advice being given about the fact that people think they don’t need to hold regular meetings or do formal documentation about the decisions made on behalf of the LLC. They’re wrong! If you want the limited liability protection offered by the LLC, then you must treat it as a separate legal entity (which it is according to state law) so that you prove that all decisions made are made by the person authorized in behalf of the LLC, and that you have a solid paper trail showing that all the decisions made in behalf of the LLC were made by those authorized and not just the individual members. (This becomes even more important in a single member LLC!) If you want the courts to treat the LLC as separate from you, then you must treat that way yourself.

Tax Implications

Taxed by the IRS like general partnerships; the LLC does not pay taxes, but instead passes its profits and losses through to its individual owners. However, an LLC may choose to be taxed like a corporation*.
The LLC must file Form 1065, U.S. Partnership Return of Income, unless the LLC elects to be taxed as a corporation*.
The LLC must also annually issue members IRS Form K-1, showing their share of the business’s profit or loss.
Single-member LLCs are treated like sole proprietorships and must report income on Schedule C unless the LLC elects to be taxed as a corporation*.

The IRS has made it possible for LLCs to be taxed as corporations so that they can retain, instead of distribute, profits to meet future business needs. The advantage of this is that members can now pay individual income taxes on only the profits actually paid to them. The business then pays taxes on any retained profits at the reduced corporate tax rates. I highly recommend you talk with your CPA before filing such an election because once the election is made you cannot return to flow-through taxation for a period of five years. In addition, you will in essence become corporate employees subject to federal and state withholdings on your wages.