LLC Explained

By Rob Jennings J.D.

A limited liability company (LLC) is a type of company that exhibits characteristics of both partnerships and corporations. Like a corporation, an LLC has a legal existence separate from that of its owners, who are called "members." Like a partnership, though, it avoids the double taxation problem that frequently accompanies corporations. Limited liability, flexibility in tax treatment and simplicity of operation have made the LLC a popular choice for small business start-ups.

Limited Liability Protection

The members of an LLC enjoy protection from the torts, or civil wrongs, committed by other members or employees of their company. With traditional partnerships, the partners can be responsible for the acts not only of their employees, but also the other partners. In an LLC, employees and members acting in the course of business are considered agents not of the individual members, but rather of the company. This protection is often referred to as the "limited liability shield," akin to the "corporate veil" of a corporation. The limited liability shield does not, however, protect a member from liability for his own acts.


LLC members also enjoy a level of flexibility in taxation that is not available to the shareholders of all corporations. Under current law, a multi-member LLC can elect taxation as either a corporation or a partnership and a single-member LLC as either a corporation or a "disregarded entity," which essentially means "sole proprietorship." For an LLC, sole proprietorship and partnership taxation mean that the company's profits are reported on the members' individual returns. With traditional corporations, company profits are taxed once at the corporate level and again on the shareholder level. This "double taxation" is one reason some entrepreneurs choose to organize as an LLC.

Ready to start your LLC? Start an LLC Online Now

Flexibility in Membership

While limited liability and pass-through taxation are available to shareholders in a corporation that files under Subchapter S of the Internal Revenue Code, not every company will qualify as an S corp. Under current IRS regulations, partnerships, corporations, LLCs and nonresident aliens cannot be shareholders of an S corp. Although individual state law controls the rules applicable to LLCs, membership in LLCs is generally far more open, allowing corporations, partnerships and existing LLCs to add another level of ownership and limited liability by becoming members in a new LLC.


For many, the main limitation of the LLC concerns the transferability of ownership interests. Operating agreements often prohibit the sale or transfer of a membership interest, and in places where sale is allowed, the member may only be able to transfer the economic benefits--the profit sharing--of the interest and not management or voting rights. Also, individual state law may dissolve an LLC upon a member's death or bankruptcy, with even more stringent transfer restrictions applying to single-member LLCs. Shares in a corporation, on the other hand, are generally transferrable and inheritable. The company continues on even after the death of a shareholder.

Ready to start your LLC? Start an LLC Online Now
What Is the Difference of a Shareholder Vs. a LLC Member?


Related articles

What Are the Benefits of a S Corp Vs. an LLC?

Minimizing tax obligations and limiting legal liability are among the most important factors to consider in choosing a legal structure for your business. Depending on your particular circumstances, either an "S corporation" or a limited liability company, also called an LLC, may provide the most advantageous structure for your business.

Can an S Corporation Be a Member of an LLC?

LLCs and S corps are two different types of designations under two different legal frameworks. LLCs are entities of state law and subject to state restrictions on ownership. Unlike an LLC, an S corp is not a business entity at all, but a federal tax classification recognized by the IRS. Both LLCs and corporations can elect to be taxed as subchapter S corps.

Risks of Getting Sued With an LLC

The LLC, or limited liability company, is a form of business organization that is recognized by the governments of all 50 states and the District of Columbia. Although the LLC form offers investors a degree of limited liability that is moderately superior to that enjoyed by a corporation, investors do not enjoy airtight protection. LLCs themselves face significant potential liability.

LLCs, Corporations, Patents, Attorney Help LLCs

Related articles

What Are the Tax Advantages of LLCs?

A limited liability company, or LLC, is a business entity that has the advantage of offering personal liability ...

S Corp vs. LLC

Among the many business organization choices facing the start-up entrepreneur stand the limited liability company (LLC) ...

Advantages & Disadvantages of a Limited Liability Company

A limited liability company, or LLC, is an entity that offers both advantages and disadvantages to a business owner. ...

Tax Differences of LLCs & PCs

A limited liability company is a company, typically with a small number of owners, known as members, that enjoys the ...

Browse by category
Ready to Begin? GET STARTED