Characteristics of a Limited Liability Company

By Stephanie Kurose, J.D.

Characteristics of a Limited Liability Company

By Stephanie Kurose, J.D.

A limited liability company (LLC) is one of the most common types of business entities among entrepreneurs and small business owners. An LLC is somewhat of a hybrid between a partnership and a corporation. It provides its members with liability protection and flexibility in terms of tax treatment and business operation. Because LLCs are governed by state law, each state provides its own rules and regulations governing the operation of an LLC. However, there are some common characteristics that apply across the board.

Group of co-workers talking

An LLC as a Separate Legal Entity

One of the defining characteristics of an LLC is that it's considered a distinct legal entity separate from its owners, or members. Similar to a corporation, it can buy and sell property, hire employees, bring lawsuits, and retain attorneys to defend itself.

Because an LLC is separate from its owners, it can generally continue to exist and operate even after a member withdraws.

Limited Liability Protection

One of the most favorable characteristics of an LLC and why it's so popular is because of the limited liability protection it provides its members. Liability protection means that when the LLC is involved in litigation or is ordered to pay a debt, its members cannot be held personally liable for any judgment against the business. Essentially, a creditor cannot come after an LLC member's personal assets in order to satisfy the debts of the LLC.

LLC members are also protected from being held personally liable for the wrongdoing of another LLC member. This is unlike a partnership, where each partner is responsible for the other partner's actions.

Taxation Flexibility

Up until now, an LLC has been sounding more like a corporation than a partnership. However, another characteristic of an LLC is the flexibility it provides in terms of how it's taxed. The Internal Revenue Service (IRS) does not have a separate category for LLCs. Thus, it can either be taxed as a partnership or a corporation.

If taxed like a partnership, the LLC itself does not pay income taxes. Rather, those taxes are passed along to the members' personal tax returns. This avoids double taxation.

Management and Operation Flexibility

Similar to a partnership, an LLC offers its members management and operation flexibility that's just not present in a corporation. A corporation is required to hold annual board meetings, annual shareholder meetings, keep minutes of those meetings, and other formalities.

An LLC, on the other hand, is not required to hold member meetings or appoint a board of directors. LLCs are characterized by simplicity in terms of documentation and operation. Record keeping is much less burdensome because no one has to prepare or file minutes of meetings. Members have more flexibility to tailor how they operate the LLC and who is responsible for day-to-day duties.

All these characteristics make LLCs an attractive option for new business owners. It's also fairly easy to start an LLC, but it's important to know the laws of your specific state.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.