LLC - Limited Liability Company

A limited liability company (abbreviated L.L.C. or LLC) in the law of the vast majority of the states of the United States is a legal form of business company offering limited liability to its owners. Often incorrectly called a "limited liability corporation" (instead of company), it is a hybrid business entity having characteristics of both a corporation and a partnership. It is often more flexible, the owners have limited liability for the actions and debts of the company, and it is suitable for smaller companies with a single owner. The primary corporate characteristic is limited liability while the primary partnership characteristic is the availability of pass-through income taxation.

LLCs may be either member-managed or manager-managed. A member-managed LLC may be governed by a single class of members (in which case it approximates a partnership) or multiple classes of members (in which case it approximates a limited partnership). Choosing manager management creates a two-tiered management structure that approximates corporate governance with the managers typically holding powers similar to corporate officers and directors. The LLC's operating agreement (the LLC version of a partnership agreement or a corporation's bylaws) determines how the LLC is managed. Corporations, S-Corporations, Limited Liability Partnerships, Limited Partnerships, Limited Liability Limited Partnerships, and LLCs lie along a spectrum of flexibility with LLCs being the most flexible, and thus preferable, for many businesses.

LLCs can lose their tax advantage without the partnership structure. The possible label "disregarded entity" for income tax purposes singles out the one-member owner of an LLC as actually earning income and deductions directly. It is the owner, then, who reports as a business proprietor, rather than as an LLC operating an active trade or business. An LLC passively investing in real estate and owned by a single member would have its income and deductions reported directly on the owner's individual tax return on a Schedule E tax form. And an LLC owned by a corporation--in other words, an LLC with a single corporate member--would be treated as an incorporated branch and have its income and deductions reported on the corporate tax return, creating double taxation.

Pass-through taxation (i.e., no double taxation), unless the LLC elects to be taxed as a C corporation. Limited liability, meaning that the owners of the LLC, called "members," are protected from some liability for acts and debts of the LLC, but are still responsible for any debts beyond the fiscal capacity of the entity.
Using default tax classification, profits are taxed personally at the member level, not at the LLC level.

Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest (see, for example, the Virginia and Delaware LLC Acts).

LLCs in most states are treated as entities separate from their members, whereas in other jurisdictions case law has developed deciding LLCs are not considered to have separate juridical standing from their members (see recent D.C. decisions).
Unless the LLC has chosen to be taxed as a corporation, income of the LLC generally retains its character, for instance as capital gains or as foreign sourced income, in the hands of the members.

Advantages of an LLC

Limited Liability. Like the shareholders of a corporation, the owners (called 'members') of an LLC have limited liability for business debts. If the LLC is properly structured and managed, each owner's personal assets will be protected from lawsuits and judgments against the business, so each owner's liability is limited to the amount each has invested in the company.

Pass-Through Taxation. If an LLC has only one owner, the Internal Revenue Service will automatically treat the LLC as a sole proprietor. Similarly, an LLC with multiple owners will, by default, be taxed as a partnership. Owners report their share of the profits and losses of the LLC on their personal tax returns, and no separate tax is assessed on the company itself

Citizenship. All owners of a Subchapter S Corporation ('S Corp') are required to be citizens or permanent residents of the United States. There is no such requirement for a general, or 'C,' corporation or for an LLC.

Management Flexibility. LLCs have much more management flexibility than corporations. Also, an LLC may be managed either directly by its owners or by a manager who may be one of the members or may be hired to run the business. Although an S corporation is limited to 100 owners, an LLC may have an unlimited number of owners.

Simple Recordkeeping. Unlike corporations, LLCs are not required to hold an annual meeting and draft meeting minutes. Note, however, that an LLC does need an operating agreement that will specify how and by whom the company will be managed, each owner's name, the amount of ownership interest held by each owner, and many other items.

Similar to a corporation, normal business expenses like an owner's salary may be deducted from the profits of an LLC before the LLC's income is allocated to its owners for tax purposes.

Flexible Profit & Loss Allocations. Unlike a corporation, an LLC is not required to allocate profits and losses in proportion to ownership interest ("member interest'). This means that the owners of an LLC can agree to allocate the company's profits and losses among themselves however they see fit and not necessarily based on the percentage of the company each owner controls.

Nationally Recognized. The LLC is now a recognized business structure in all 50 states and the District of Columbia.