What Does 'LLC' Mean in a Business?

By Larissa Bodniowycz, J.D.

What Does 'LLC' Mean in a Business?

By Larissa Bodniowycz, J.D.

As you start a business, you'll likely hear the term “LLC." Perhaps someone has told you without hesitation that you should form an LLC. Maybe someone else told you that their business is an LLC. Yet another person might say that their business is not an LLC because it's too expensive. With all this talk about LLCs, it's still possible that you don't know exactly what one is.

The LLC as a Business Entity

“LLC" stands for “limited liability company." A limited liability company is a business entity governed by state law, and it does what its name implies: it limits the personal liability of its owners.

Other types of business entities are corporations, partnerships, limited partnerships, and sole proprietorships. Each has its own set of advantages—some of which overlap—and deciding upon a form of business is a crucial early step in the process of starting your company.

Why LLCs Are Important

A limited liability company gives a business owner an option that exists somewhere between a partnership and a corporation. Most importantly, limited liability companies provide limited liability, which means that the business's debts and obligations belong only to the business. When operated properly, LLCs prevent creditors of the business from seizing the personal assets of the LLC's owner. With sole proprietorships and partnerships, this isn't the case. If you want to take advantage of this benefit, you must register as an LLC and not allow your business to become a sole proprietorship or partnership by default.

LLCs provide flexibility when it comes to ownership, management, and taxation. LLCs refer to their owners as members, and state laws don't put many limits on who or what can be a member of an LLC. They can have as many members as they like, and those members can be individuals, corporations, other LLCs, or trusts—they can even be citizens of foreign countries. LLCs don't have to choose board members, elect officers, sell shares, or hold annual meetings. An LLC can hire managers, but it doesn't have to—it's legal to be a member-managed LLC.

By default, LLCs enjoy pass-through taxation. They don't pay federal business taxes; the profits and losses of the company pass through to its members, who pay taxes on the income at the individual level. However, most LLCs can elect to be taxed like corporations. Check the laws in your state regarding taxation on LLCs at the state level, as these vary.

Registering an LLC

Unlike a partnership and a sole proprietorship, which can both form without any formal paperwork, an LLC must register with the state by filing articles of organization (sometimes called a certificate of organization) and paying a filing fee.

Rules and fees for registering LLCs vary, so it's important to view them ahead of time. The rules for each state appear in that state's limited liability company laws, which are usually available to view online for free. Secretary of State websites sometimes provide lists of actionable steps that are easy to understand and follow.

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.