Limited Liability Company (LLC)

Definition

The term limited liability company, or LLC, is used to describe a business structure whereby the owners and managers of that organization are afforded limited liability exposure.

Explanation

Limited Liability Companies have grown in popularity because of their limited personal liability feature.  The structure is described as being a hybrid between a corporation and partnerships / sole proprietorships.

  • Corporation:  created as a separate legal entity, liabilities distinct from members, shareholders lose investments if the corporation fails.
  • Sole Proprietorship: a business that is owned and run by one person, with no legal difference between the owner and business.

The creation of a business structure, such as an LLC, is made possible by state statute, meaning the rules of formation can vary slightly from state to state.  For example, most states permit a single owner to form a Limited Liability Company.

Limited Liability Companies are treated as pass-through entities for income tax purposes.  If there is only one member in the company, that individual would file a combined tax return.  Federal regulations prohibit certain types of businesses such as banks, not-for-profit organizations and insurance companies, from forming a LLC.

Related Terms

corporation, sole proprietorship, partnership, organization costs, business organization, articles of incorporation