A Limited Liability Company (LLC) is a very flexible form of
business structure that combines elements of the typical corporation and
partnership structures. By forming an LLC, you create a legal entity
that provides limited liability to its owners. Often, these are
incorrectly called a Limited Liability Corporation instead of Limited
Liability Company. It is truly a hybrid business entity that can contain
elements and/or characteristics of corporations, partnerships and even
sole proprietorships, depending on how many owners are involved in the
Limited Liability Company. An LLC, even though it is a business entity,
is actually a type of unincorporated business and is not a corporation.
The main characteristic that an LLC shares with a corporation is the
limited liability protection that they both offer. The main
characteristic that an LLC shares with a partnership is the pass-through
income taxation that they both offer. It is, however, much more
flexible than a corporation and is very well suited to single owner
You should understand that neither limited liability
companies nor corporations always protect owners from liability. The
legal system in the United States does allow a court system to pierce
the corporate veil of an LLC if some type of fraud or misrepresentation
is involved or in a situation where the owner uses the company as an
Flexibility and Default Rules
All LLC legal
statutes include a phrase similar to "unless otherwise provided for in
the operating agreement" and this allows for the flexibility the members
of an LLC have in deciding how their LLC will be governed. Some
statutes provide default rules for the governance of an LLC that are in
effect unless an operating agreement has been adopted.
the purposes of the Internal Revenue Service and Federal income tax
purposes, LLCs are treated by default as a pass-through entity. If the
limited liability company has only one member or owner, it is
automatically considered a "disregarded entity" for tax purposes and the
owner is allowed to report the income from the LLC on his or her own
personal tax return as a Schedule C. If the LLC has multiple owners, it
is treated as a partnership and must file IRS form 1065. Partners will
then receive a K-1 for their share of losses or income so they can
report it on their tax return.
LLCs also have the option of
electing to be taxed as a corporation, simply by filing IRS Form 8832. Then, they will be treated the same way as a regular C Corporation or
they can elect to be treated as an S-Corporation. If it is treated as a
C-Corporation, the entity's income is taxed before any dividends or
distributions are given to the members and then taxation of the
dividends or distributions will be taxed as income for the members. Some
analysts have recommended the LLC taxed as an S-Corp as the best
possible small business structure, because it combines the flexibility
and simplicity of the LLC with the self-employment tax savings of the
Here are the attributes of a limited liability company that are most widely viewed as advantages:
the box taxation. LLCs have the option of being taxed as a sole
proprietor, partnership, S-Corporation or C-Corporation, which provides a
great deal of flexibility.
•Limited Liability. The owners of an LLC, who are known as members,
are generally protected from some or all liability related to the acts
and debts of the LLC, depending on state laws where the LLC formation
•Administrative paperwork and record keeping is significantly simplified compared to a corporation.
•Pass-through taxation is automatic, unless the LLC elects to be taxed as a C-Corporation.
•Profits are taxed at the member's personal level, rather than at
the LLC level by simply using the default tax classification given by
•In most states, LLCs are generally treated as being a totally separate entity from the LLCs owners.
•LLC's can generally be set up with only one person being involved.
•An LLC can assign its membership interests, and the economic
benefits of those interests can then be separated and assigned, which
provides the economic benefit of distributing the profit and losses of
the company, like in a partnership, without actually transferring the
title to the interest.
•Except in cases where the LLC has adopted a corporate taxation
structure, the income from the LLC will generally remain in the hands of
•By adopting an operating agreement, members can generally establish
their own rules for governance and protective provisions for the
Here are the attributes of a limited liability company that are most widely viewed as disadvantages:
states do not have a statutory requirement for an LLC to have an
operating agreement, however, if you are a member of a multiple member
LLC, you may run into problems if you don't have an operating agreement,
since most states do not dictate the governance and protective
provision for the members of an LLC as they would with a regular
•If a member decides to sell his interest in a limited liability
company, and if the ownership of the LLC is vested in multiple members,
it is not as straight forward as with a corporation since the LLC cannot
issue and sell stock certificates.
•Some investors are more comfortable with investing in corporations,
due to the possibility of an eventual IPO. This can make it harder to
raise financial capital.
•Franchise taxes are levied on LLCs in many states. This tax is
essentially a fee the LLC pays the state for the benefit of providing
limited liability. This tax can be based on revenue, profits, the number
of owners, the amount of capital employed in the state, or some
combination of these.
•LLCs are considered to be taxable entities in the District of
Columbia, which eliminates the benefits associated with pass-through
•In some states, renewal or annual fees may be higher than corporations.
•Creditors have been known to require members of LLCs to personally
sign for and guarantee debts of the LLC, which obviously makes to owners
personally responsible for the debt.
•A Series LLC is a special and uncommon type of LLC. It allows a single LLC to segregate its assets into separate series.
•A Professional Limited Liability Company, also known as a PLLC,
P.L.L.C., or P.L., is a type of LLC that is specifically organized to
perform a professional service. This will usually involve professions
where the state requires a license to provide these same services, like a
doctor, chiropractor, lawyer, accountant, architect, or engineer. Some
states do not allow an LLC to participate in the practice of a licensed