Limited Liability Company (LLC)

A limited liability company (LLC) is a flexible U.S. business structure that combines limited personal liability for owners with the tax and operational flexibility of a partnership or sole proprietorship. LLCs are widely used by small and medium businesses because they protect owners’ personal assets from most business debts and legal claims while allowing simplified management and tax options.

How an LLC works

Owners are called members. Members can be individuals, corporations, other LLCs, or foreign entities (state rules vary; some entities such as banks and insurance companies may be restricted).
Limited liability generally shields members’ personal assets from company creditors and lawsuits, though liability protection can be pierced for fraud or failure to follow legal requirements.
Formation requires filing articles of organization with the state and paying a state fee. States set most LLC rules, so requirements and fees vary.
Taxation:
Default: single-member LLCs are treated as disregarded entities (taxed on the owner’s return); multi-member LLCs are treated as partnerships (Form 1065).
An LLC can elect to be taxed as an S corporation or a C corporation (Form 1120) if desired.
Pass-through taxation avoids corporate-level double taxation; profits and losses flow to members’ individual returns.
Members with pass-through income may owe self-employment taxes.
Management: LLCs can be member-managed or manager-managed (members hire managers).
Important documents: articles of organization, operating agreement, and obtaining an Employer Identification Number (EIN). A registered agent is required in most states to receive legal and tax correspondence.

Forming an LLC — basic steps

Choose a compliant business name (state-specific rules apply).
File articles of organization with the state and pay the filing fee.
Obtain an EIN from the IRS for tax and payroll purposes.
Create an operating agreement that defines ownership, voting, profit distribution, member roles, capital contributions, and procedures for member changes or dissolution.
Appoint a registered agent and complete any required state or local licenses and permits.
Meet ongoing state requirements (annual reports, franchise taxes, or fees where applicable).

Benefits

Limited personal liability for business debts and legal claims.
Flexible taxation options (pass-through by default or elect corporate taxation).
Simpler record-keeping and fewer formalities than corporations.
Management flexibility: members can manage directly or appoint managers.
Credibility boost compared with sole proprietorships or informal partnerships.
Business expenses are generally deductible, reducing taxable income.

Drawbacks and limitations

State rules vary; some states may dissolve an LLC upon a member’s death or bankruptcy unless succession is addressed in the operating agreement.
Members who receive pass-through income may be subject to self-employment taxes.
Poorly drafted operating agreements can create ambiguity about roles, responsibilities, and capital contributions.
LLCs are not generally the preferred structure for businesses that plan to go public.
In some cases, personal liability protection can be pierced for misconduct, commingling of funds, or failure to follow required formalities.

LLC vs. Partnership

Liability: An LLC provides limited liability protection that typical general partnerships do not (general partners can be personally liable for business debts).
Taxation: Both can offer pass-through taxation, but an LLC can also elect corporate taxation. Multi-member LLCs taxed as partnerships file Form 1065; corporations file Form 1120.
Continuity and transferability: LLCs can use operating or buy-sell agreements to manage ownership transfer and continuity. Partnerships without such agreements may require dissolution and reformation when ownership changes.

Common uses and examples

Small businesses, family-owned businesses, real estate holding entities, professional groups (e.g., physician groups), and single-owner enterprises often use LLCs for liability protection and tax flexibility.
LLCs can take many forms: single-member LLCs, member-managed LLCs, manager-managed LLCs, and family LLCs.

Bottom line

An LLC is a popular and adaptable business structure that protects owners’ personal assets while providing flexible tax and management options. It’s generally easier to form and operate than a corporation, but state-specific rules and careful drafting of the operating agreement are essential to preserve liability protection and ensure smooth operation and succession.