The Legal Definition of LLC

by William Pirraglia
LLCs are hybrid structures including personal asset protection and tax treatment choices.

LLCs are hybrid structures including personal asset protection and tax treatment choices.

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OK, definitions are often boring. However, defining an LLC (limited liability company) is an exception to the rule. LLCs are wonderful, albeit strange, company structures. Consider the basic unusual components. LLCs are like corporations, yet they are not. The Internal Revenue Service doesn't even recognize their existence. LLCs can choose to be taxed like corporations and enjoy owners' personal asset protection, but need not comply with most other corporate requirements. Be prepared for a most different definition.

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What Is an LLC?

Unlike a corporation, recognized by governments around the globe, an LLC is not even recognized by the U.S. government. An LLC is a pure "creature of the state," given life by individual state statutes and regulations. A hybrid combination of corporation and other business structure, an LLC is different from, yet potentially similar to, all other U.S. companies. The choice is yours. With the personal asset protection offered by corporations, you can also operate your business like a partnership or sole proprietorship, for tax reasons.

Limited Liability Feature

While we hesitate to use the term "unique" for any purposes, an LLC fits this description. Lacking the reporting or tax liabilities of a corporation, an LLC still offers you the safe harbor of personal asset exemption of a corporation should you face hungry creditors. Should your LLC fall on hard times, facing creditors seeking to collect company debts beyond your company's ability to pay, your personal assets -- home, autos, bank accounts -- are unavailable for attachment or recovery. Like a corporation, LLC owners do not expose their personal cash or other assets to risk, unless the company or the owners have committed illegal acts.

Tax Treatment Options

LLCs, like S corporations, are "pass through" organizations, not incurring direct tax liability. All profits are passed through the company to the individual owners -- called members in an LLC -- to be included on their personal income tax returns. LLCs can choose to be taxed as corporations -- either sub-chapter S or standard C corporations -- as partnerships or as sole proprietorships. Other business structures have no such choices, except for S corporations, whose profits are also distributed to individual owners as personal income.

LLC Restrictions

Definitions of LLCs must include their ownership restrictions, when compared to classic corporations. LLCs are limited to 100 stockholders or less, all of whom must be U.S. citizens or legal resident aliens. If your goal is to create the next mega-company, like IBM, these LLC restrictions will direct you to choose a corporation structure, allowing you to sell stock to whomever you choose. LLCs are designed for smaller businesses, the owners of which function more like a partnership than a mega corporation.