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In the Introduction, we listed the various types of business you may see when underwriting and documenting a self-employed borrower. In this learning clip, the business type we will focus on is the limited liability company (LLC).
Please remember that you are responsible for determining if your borrower’s income documentation demonstrates that he or she will have the financial ability to repay the mortgage.
The following chart describes the tax reporting information and advantages/disadvantages of an LLC.
Number of Owners |
No limit on number of shareholders |
Where is business income reported? |
The forms necessary for filing as an LLC depend on the type of federal tax entity that is either elected or defaulted to.
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Where is owners' income reported? |
Part II of Schedule E on Form 1040 via K-1 (distributions) |
Taxation of business income |
All income is passed through to individual shareholders who pay tax on income at their personal rate. |
Main Advantage |
Combines the limited liability protection of a corporation and the pass through taxation of a sole proprietorship or partnership. |
Main Disadvantage |
Forming an LLC is more expensive than a partnership or a sole proprietorship. Does not offer the free transferability of ownership, perpetual existence, and the ability to be totally owned by a single individual as with a corporation. State statute frequently limits the life span of an LLC to less than 30 years. If maintained beyond that, the IRS may consider it to be a corporation. |
Limited liability companies were first introduced in Latin America and Europe. The IRS introduced them in the United States in 1988 as a pass-through status, meaning that they pass the income or loss of the business through to the owner’s personal taxes—very similar to a partnership or S corporation.
LLCs are governed at the state level, so regulations and requirements may vary from state to state. Most states require at least two members to form an LLC. They are more attractive to foreign investors because they are not as restrictive as S corporations.
 Eric - Hard at Work |
Eric runs a computer repair shop out of his California-based office. Eric's LLC is doing so well, he wants to increase the size of his workshop. |
Freddie Mac treats the documentation of a limited liability company similar to two other business types, so proceed to either the general and limited partnership or S corporation learning clip to continue your learning experience.
| © 2008 Freddie Mac |  |