2

A Limited Liability Company (LLC) is a business under US law with the following characteristics:

  • Establishes a "corporate veil" of limited liability, such that creditors or lawsuits can only go after the company's assets, and not personal assets of the owner(s).
  • Requires much less in the way of formalities than a corporation.
  • Treated as a flow-through entity by default, meaning that the income of the company is treated directly as the income of the owner(s), rather than being held by the company and paid out as salary or dividends. (Not all LLCs operate as flow-through entities, but this question is only about those that do.)

At first glance, it appears that the first and third points above are in conflict with one another: if all revenue generated by the company flows directly to the owner(s) rather than being retained by the company itself, then the company has no money of its own with which to purchase company assets!

Obviously this has to be an overly simplistic understanding, but I'm having trouble finding a plain-English description of how it really works. So my question is, what are the principles by which a flow-through LLC segregates company money and assets from flow-through payments to the owner(s)?

5

My understanding is that the "flow-through" treatment is specifically a tax law concept. The LLC has its own income, which it can use to pay expenses or acquire assets or for whatever other purpose, and such assets become the property of the LLC. It's just that when it comes time to pay taxes, the LLC's net income is taxed as income to the owner. But that does not mean that the LLC's income is treated the same as the owner's income in all other legal contexts.

  • That's the right answer. Just to add a couple of clarifications:The concept is specifically a US Federal income tax idea adopted by US states and localities (not all!) and some international tax jurisdictions (which occasionally refer to them as "transparent"). Second, the concept didn't start with LLCs and doesn't apply only to them. Partnerships (in the US) are also flow-through (actually, LLC are treated as partnerships for tax purposes) and so are S corporations and some trusts. Finally, single member LLCs are totally disregarded and treated as owned by the sole member. – Jack Fleeting May 4 at 11:27
2

You are placing too much importance on "flow-through". It does not even belong on the same list as the others.

LLCs are defined by state governments. They decide what an LLC is, what features it gets, and whether it can hold property. ("yes").

When an LLC holds property, the title is held by the LLC. Period. The state gets to decide that.

The IRS is a distant observer in all this. Now when Congress saw the states setting up LLCs, they saw fit to implement an option for pass-through tax treatment on Federal taxes. States followed suit, to keep taxes from being ludicrously complex. The Federal government does not define ownership rights.

-2

Income would be what you do not spend on the business and the owners would get payed from that. It's not that you keep every penny that comes in.

  • This answer seems to be confusing income and profit. – David Siegel Apr 25 at 19:34
  • It is not. It literally separated the two. The question is confusing it. At least the way I take it, it is. – Putvi Apr 25 at 19:36
  • I think you mean revenue and profit @DavidSiegel. Income is profit. – Putvi Apr 25 at 19:59
  • @ Putvi I have to tell you, profit is income minus cost, in general. A firm can have large income and no profit.Income is revenue, plus investment income and other sources of income. – David Siegel Apr 25 at 20:56
  • 1
    No, I run my own business, no accounting firm is going to call income and revenue the same thing. – Putvi Apr 25 at 21:03

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.