A limited liability company is organized according to the state laws where it is formed and operated. The owners of the company are known as members. The net income of the company is passed through as personal, not business, income, and is declared to the Internal Revenue Service on personal income tax forms. There is no business or corporate income tax at the federal level, although some states tax LLCs as corporations or partnerships, and not as individual income.
LLC Member Protection
LLC members are protected from personal responsibility for the debts of the company, and their risk in the business is limited to the amount of money they originally invested. Although the LLC can be sued for damages or debt, the members are protected from personal liability for any judgment entered by a court against the LLC. This affords a business more legal protection than is possible with a sole proprietorship.
The abbreviation "Ltd." stands for "limited," and a company carrying this abbreviation has the same limited liability feature as an LLC. Partners and owners in the company are protected from personal responsibility for debts and lawsuits. Ltd. is a descriptor, not a specific business entity, in the United States. A "C" or "S" corporation, for example, may carry "Ltd." at the end of its name. The Ltd. abbreviation as a legal business entity is common in the European Union, where laws governing business formation are more specific with regard to the number of shareholders, how dividends are paid and taxed, and other matters.
Taxes and Shareholding
Unlike LLCs, Ltd. companies, when operating as "C" corporations, are taxed as separate entities on their net income at the prevailing business tax rate. The laws governing such companies in Europe restrict who may be a shareholder, and shares are traded privately, rather than through a public stock exchange. LLCs do not issue shares per se, either publicly or privately, although they can use operating agreements that spell out how the income from the business will be divided among members.