A limited liability company, or LLC, is a type of business structure where the owners or partners -- called members -- have only a limited liability for the debts and liabilities of the company. An LLC is generally formed by filing a document, called the Articles of Organization, with your state's tax office or Secretary of State. Limited liability companies are popular because they can offer tax advantages, and a high degree of ownership and management flexibility.
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LLCs have a number of tax advantages over other types of business structures, such as S-corporations, partnerships and sole proprietorships. The Internal Revenue Service allows LLCs to be taxed on a "pass-through" basis. This usually means that any profits from the company can be reported on the members' tax returns and taxed at their personal rate of return -- which can be much cheaper than the corporate rate. It usually also means that any losses, deductions and tax credits from the LLC can also be reported on members' tax returns. This may be able to save you a great deal of money in taxes, and prevents double taxation in which the corporation and members pay tax on the same earnings. LLCs can also elect to be taxed in a different category, such as a sole proprietor, partnership or corporation, providing additional flexibility.
Unlike some other types of corporations which are allowed only a limited number of shareholders who all need to be citizens or residents of the United States, LLCs can have any number of members, and can include foreign citizens. LLCs can also be formed with only one member. In some states, the owner of an LLC can itself be an LLC. Unlike other types of corporations, there are usually no requirements for LLCs to hold annual shareholder meetings, and a board of directors is not required.
Members of an LLC are not usually held personally liable for any debts or other types of liability -- such as court judgments -- against the company. In a business context, this means that members' personal assets are usually protected. For example, if the LLC owns an apartment building and is sued when a tenant trips and falls, individual members typically cannot be made to pay for any damages. In general, members are only liable for the debt that they personally guarantee. In addition, if the business fails, the debts are normally not automatically carried over into the members' next business.
In many corporations, management is conducted by a chief executive officer who reports to a board of directors. In an LLC, there need not be a board of directors, and each member usually participates in the management of the business. This type of LLC management structure is called “member management.” In some LLCs, called “manager managed” LLCs, one or more members manage the company and make decisions, while the others merely share in the profits. This allows a great deal of flexibility to the management structure compared with some other types of corporations.