Define Limited Liability Company

By Lee Carroll

A limited liability company, or LLC, is a type of business structure. Sometimes referred to as a hybrid, LLCs draw positive features from partnerships and corporations, blending them into an arrangement that often appeals to small and large companies. Each state has its own regulations for this type of structure, but many defining elements are consistent throughout the country.

A limited liability company, or LLC, is a type of business structure. Sometimes referred to as a hybrid, LLCs draw positive features from partnerships and corporations, blending them into an arrangement that often appeals to small and large companies. Each state has its own regulations for this type of structure, but many defining elements are consistent throughout the country.

Business Ownership

Limited liability companies are owned by members, not shareholders. Each member owns part of the company, but dividends, in the traditional sense of the word, are not paid. In many states, membership is not limited to individuals, and can include corporations, other LLCs and foreign entities. Membership numbers are not restricted, so an LLC can exist with as many members as necessary or as few as one. Another benefit of this type of business structure is the freedom members have in decision making and daily business operation, explains the Ohio Practical Business Law website. Unlike corporations, limited liability companies are usually not permanent -- if one member dies, for example, the LLC may be required to dissolve. However, the surviving members may form a new LLC.

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Tax Benefits

Unlike corporations, LLCs are not taxed as business entities. Instead, the company files an IRS form 1065 listing each member's taxable income or profit from the company, according to the Internal Revenue Service. This allows members to pay taxes through personal income tax returns, which generally reduces the overall tax burden on company profits. This is known as pass-through taxation -- the tax burden passes through the company to its members, who often pay a significantly lower rate on individual earnings than the company would on overall profits. However, if there is only one member in an LLC, the company is taxed as a sole proprietorship.

Personal Liability Protection

Personal liability is restricted within an LLC. If the company is faced with duties to creditors, the company is liable while the owners' personal assets remain protected in most situations. Likewise, members are usually protected from personal liability resulting from lawsuits against the company. This benefit can make an LLC structure a better choice for a smaller business that would otherwise organize as a partnership which offers little or no personal liability protection.

Member Compensation

There are some freedoms with LLCs that do not exist in other business organizations, especially regarding compensation. Instead of salary-based pay checks or dividends, for example, members may accept profit distributions or the company may be structured to make guaranteed payments to members based on the company's profits. Profit distributions allow a member to receive her share of profit by simply writing a check. Guaranteed payments give members a more steady sense of earnings from the business. Both options are usually based on the available funds of the company, and create the need for strict accounting practices.

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