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LLC stands for Limited Liability Company. It combines some of the most important features of a corporation and a partnership.  Like a corporation, an LLC offers limited liability, namely protection from personal liability for business debts and other acts of the corporation.  However, like a partnership, an LLC’s profits and losses can “pass through” to the owners, thus avoiding the double taxation imposed on ordinary corporations and their owners.

Forming an LLC is more complicated than forming a partnership or sole proprietorship, but it is generally simpler and can be less expensive that forming a corporation.  The business owner files documentation with the state along with filing fees, and the LLC is formed.

A big advantage of an LLC is its immense flexibility. In contrast to a corporation, which has a much more formal, set management structure, the owners of an LLC can run the company as they see fit.  They can also decide if they want the company to be taxed as a corporation.  However, most business owners choose “pass through” taxation as explained above. 

An LLC is formed by filing Articles of Organization with the state.  This document contains the company name, appoints a registered or statutory agent and authorizes the company to engage in a particular kind of business.

An LLC may have an Operating Agreement, which determines how the company is run and the rights and limitations of ownership.    

Owners of an LLC are commonly called members and may have varying membership interests. 

A member of an LLC can be a person, corporation, partnership or another LLC.

Owners are protected from personal liability for business debts and claims, similar to the protection granted to shareholders of a corporation.

LLC’s are easier to manage than corporations.  They do not have to elect a board of directors, hold shareholder meetings, or file annual reports. 

An LLC can avoid “double taxation”.  Profits pass through the LLC and are declared as the personal income of the owners. 

While most LLC’s elect to have “pass through” taxation, they have the option of being taxed like a corporation if that is more advantageous.

Exceptions to Limited Liability

Although most business owners form an LLC for the benefits of limited liability, that protection is not absolute.  Owners may find themselves liable in the following circumstances:

• An owner personally or directly injures someone while acting on behalf of the LLC.
• An owner personally guarantees a business debt or loan and the LLC defaults.
• A member fails to deposit taxes withheld from employee paychecks.
• An owner commits an intentional act of fraud or an illegal or reckless act.
• An LLC serves merely as an extension of the owner’s personal affairs instead of acting as a separate legal entity.

The LLC is an increasingly popular form of business organization because it offers the benefits of a corporation and the flexibility of a partnership.  With its low initial setup cost, simple filing requirements, and flexibility in structure the LLC is a smart choice for a start up businesses.