The Limited Liability Company or LLC, is not a partnership or a corporation. Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. An LLC is a distinct type of business that offers an alternative to partnerships and corporations, by combining the corporate advantages of limited liability with the partnership advantage of pass-through taxation.

Limited liability companies, or LLCs, are becoming more and more popular, and it's easy to see why. The Limited liability Company (LLC) provides the desired limited liability while avoiding some of the drawbacks (like double taxation and excessive paperwork). They combine the personal liability protection of a corporation with the tax benefits and simplicity of a partnership. In addition, they're more flexible and require less ongoing paperwork than corporations.

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 may be an unlimited number of members. Most states also permit "single member" LLCs, those having only one owner.

Member owned LLCs are analogous to partners in a partnership or shareholders in a corporation, depending on how the LLC is managed. A member will more closely resemble shareholders if the LLC utilizes a manager or managers, because then the members will not participate in management. If the LLC does not utilize managers, then the members will closely resemble partners because they will have a direct say in the decision making of the company.

A member's ownership of an LLC is represented by their "interests," just as partners have "interest" in a partnership and shareholders have stock in a corporation.

Limited Liability Company: LLC provides pass through taxation and avoid the double taxation. LLC is much more flexible from small business point of view as it has tax flexibility. An, LLC is generally recommended for a real estate business due to its active and passive tax treatments.

Active Activities Includes;

Example of non passive activities:

• Businesses in which an individual is a salaried person or wage earner.

• Businesses who offers guaranteed remuneration.

• Activities which involve interests, stock, bonds and dividend payments.

• Activities which involve royalty payments.

• Sale of investment property.

• Business entities like partnership, Corporations, Limited Liability Companies where the owners/ members/ partners are active Partners and ACTIVELY PARTICIPATE IN THE decision making, management, affairs and conduct of the business

• Farming business where an individual/ tax payer regularly works.

Passive Activities Includes;

Example of Passive activities:

• Real estate business

• Equipment leasing.

• Farming where an individual/ tax payer does not actively participate.

• Business entities like partnership, Corporations, Limited Liability Companies where the owners/ members/ partners remain sleeping partners and do not actively participate.

Depending on choice made by the LLC and the members, the IRS will treat an LLC as either a corporation, S Corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”). An LLC that does not want to accept its default federal tax classification, or that wishes to change its classification, uses Form 8832, Entity Classification Election, to elect how it will be classified for federal tax purposes.

A limited liability company that files Form 1023 is treated as a corporation rather than a partnership. As a corporation, it may file Form 1023. Note, however, that a limited liability company should not file an exemption application if it wants to be treated as a disregarded entity by its tax-exempt parent.

Limited Liability Company: If LLC is taxed as partnership, partnership tax rules will apply to LLC and it should file Form 1065 (US return of Partnership Income). For filing this form, each member should show their prorated income, deductions, credits.

If LLC chose to taxed as sole proprietor, then LLC use Form 1040, Schedule C, E and F for reporting its income, losses, deductions, credit.