A limited liability company (LLC) is a hybrid business form that allows flexibility in management and operations (as with a sole proprietorship or partnership) while also protecting its owners from personal liability (as with a corporation).
Learn More about Limited Liability Corporations (LLC)
- Limited Liability: if the LLC incurs debts, the members generally will not be held personally responsible for these debts. Their assets will be shielded from the company's creditors.
- Flexibility: LLC members can choose to allocate the company's profits and losses in whatever way they agree to, without regard to how much of the LLC they own. This flexibility is not available with an S-corporation.
- Ease of Administration: corporations are required to hold regular meetings, maintain written records of major decisions via resolutions, and issue share certificates to its shareholders. Failure to maintain these formalities can result in loss of limited liability protection. By contrast, most states do not require LLCs to hold annual meetings, issue membership certificates, or prepare resolutions--making LLCs easier to administer.
- Pass-Through Taxation: unlike with a C-corporation, an LLC's income is not taxed at the company level. Instead, the company's profits and losses are "passed through" to its members, who will pay taxes only on their share of the LLC's profits.
- Outside Investment: because LLCs are not required to keep a rigid structure and maintain corporate formalities, investors may be more hesitant to invest in an LLC than in a corporation.
- Franchise Taxes: some states (including California) require LLCs to pay annual franchise taxes.
An LLC is usually organized with the secretary of state (or its equivalent) in the state where it will operate. The owners, called members, have limited liability—that is, they are generally protected against personal responsibility for the debts and obligations of the LLC, much like shareholders of a corporation are shielded from liability for corporate debts. So if the LLC incurs a liability it cannot pay, its members generally will not be responsible for paying that debt.
Unlike corporations, LLCs are not required to appoint directors, maintain corporate formalities (i.e., hold regular meetings and prepare meeting minutes and resolutions), or issue share certificates. This makes administering an LLC easier, less time consuming, and oftentimes less costly than running a corporation, and it is one reason many business owners prefer the LLC form.
An LLC can have one of two different management structures: it can be either “member-managed” or “manager-managed.” In a member-managed LLC (which is more common), the LLC members share responsibility for managing the company’s affairs. In a manager-managed LLC, one or more managers (who need not be members) are appointed to run the company’s daily affairs. A manager-managed LLC is often chosen in situations where some or all of the members prefer to be passive investors instead of actively managing the LLC.
Similar to sole proprietorships, partnerships, and S-corporations, LLCs are by default considered "pass-through" tax entities. Accordingly, the LLC will not pay federal taxes on its profits at the LLC level (unless it chooses to be taxed as a C corporation). Instead, the LLC’s profits and losses will be passed through to its members, who will then report their share of the LLC’s income on their personal tax returns. Since the LLC does not pay federal income tax at the company level, it avoids the “double taxation” that C corporations are often subject to.