A limited liability company ("LLC") is a type of business structure. It is a separate and distinct legal entity. As a legal entity, an LLC can have its own unique Tax ID number, open bank accounts, sign leases, and conduct business in general in its own name. An LLC is owned by its members. It shares certain characteristics of a partnership and other characteristics of a corporation. A limited liability company is similar to a partnership in the way that it is taxed as a pass-through entity. An LLC may, though, opt to be taxed like a corporation. An LLC resembles a corporation in that provides limited liability to its members. Management of an LLC is vested in its managers. By default, all of the members are managers. An LLC operating agreement may designate one or more of the members as managers or require an outside manager.

A limited liability company is formed under the laws of the chosen state. It can be simpler and less expensive than forming a corporation. Each state requires that the organizer of a new LLC file Articles of Organization (or similar document) with the secretary of state and pay the state filing fee. The requirements of the organizational document vary from state to state. Generally, the new business must at least provide the company name, appoint a registered or statutory agent, and affirm that the company is authorized to engage either in any legal business or a particular kind of business. Once the articles are accepted by the state, the LLC is a legally formed entity.

The limited liability company ("LLC") structure offers a number of advantages:

• Limited Liability - The owners of an LLC ("members") have limited liability, meaning they are protected from liability for acts and debts of the LLC.
• Taxation - Under the default tax classification, LLC profits are taxed at the member level, not at the LLC level. This pass-through taxation avoids the double taxation of corporations. With "check-the-box" taxation, an LLC can elect to be taxed as a corporation if circumstances make that format more suitable.
• Single Owner - A limited liability company can be formed with just one owner. Usually the one member must be a natural person, but in some states a single owner can be an entity.
• Few Formalities - In most states, there is no requirement that an LLC hold an annual meeting of owners. An LLC also tends to require minimal administrative paperwork and record keeping.
• Flexible Management - Members of a limited liability company do not cede any power to a board of directors, however an operating agreement may provide for centralization of management power in a similar body.
• Enduring Entity - Limited liability companies are enduring legal business entities. Their lives extend beyond the illness or death of their owners. This advantage allows an LLC to avoid the problems associated with business termination or sole proprietor death.
• Transferability of Ownership - 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 and losses like a partnership, without transferring the title to the membership interest.

Choosing a state in which to form a limited liability company is an important decision in the entity formation process. Most businesses, especially smaller ones, choose to form an LLC in their home state where the entity will operate. Forming an LLC in the company’s home state prevents the need for additional registrations, maintenance fees, and out-of-state registered agent fees. It also negates the need to pay franchise taxes and other government fees in multiple states.

Many company owners decide to register in a state other than the home state. There may be tax advantages, greater support from the legal system, or other reasons. Delaware and Nevada are popular states in which to form an LLC, primarily because the LLC need not be physically present in the state and neither has a state business income tax.

Owners of a limited liability company ("LLC") are members. A member’s relationship to an LLC is similar to the relationship of a shareholder to a corporation or partner to a partnership. Rights and duties of ownership of an LLC are generally controlled by the LLC’s operating agreement. LLC ownership shares can be numerically expressed by percentage or membership units, which are similar to shares of stock in a corporation. Ownership generally confers the right to vote and the right to share in profits. LLC’s can, however, be structured with varying classes of ownership interests, which provides flexibility in the way members share profits and vote. Some states require that the LLC formation papers, the Articles of Organization, list the LLC’s initial members. Other states do not require that member information be disclosed.

An LLC can be managed either by its owners ("members") or managers, who do not own any part of the LLC. An LLC that is managed by its owners is referred to as member-managed. An LLC managed by an outside manager is called a manager-managed LLC.

Many states require that an LLC have an operating agreement. An operating agreement serves as the rulebook for governing and managing the limited liability company. Among other things it specifies members’ financial and managerial rights and duties.

For federal income tax purposes, an LLC may be classified as a sole proprietorship, partnership, or corporation.

By default, an LLC with a single owner is "disregarded" and treated as a sole proprietor. The LLC does not pay federal income tax. Instead, the owner must report the LLC’s income and deductions on his or her own individual tax return as income or loss from a sole proprietorship.

By default, an LLC with multiple members is treated as a partnership. A partnership is a type of "pass-through" entity whereby its income and losses pass through directly to partners. An LLC that is treated as a partnership for taxation must report its income and deductions on a partnership tax return. That tax return then allocates the income and deductions among the LLC members, who are effectively the partners. Each LLC member receives a Form K-1, which shows the member’s share of the income and deductions flowing out of the LLC, and which the member must attach to his or her individual tax return.

The IRS allows owners of a limited liability company to opt out of the default tax classifications and instead be treated as a corporation. In some instances, corporate classification may benefit the LLC or its owners because of lower tax rates, carrying loss forward, or other accounting reasons. An LLC that wants to be taxed like a corporation must proactively elect that treatment by filing either IRS Form 8832 or Form 2553.

Many business owners form an LLC for the benefits of limited liability. That protection, however, 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 commits an intentional act of fraud or an illegal or reckless act.
• An owner personally guarantees a business debt or loan and the LLC defaults.
• An LLC serves merely as an extension of an owner’s personal affairs instead of acting as a separate legal entity.
• A member fails to deposit taxes withheld from employee paychecks.

In order to benefit from the protections afforded an LLC, it is important that you maintain the separate nature of the entity and not use the LLC for fraudulent purposes.