What Is a Limited Liability Company (LLC)?

What Is a Limited Liability Company (LLC)?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A Limited Liability Company (LLC) is a type of business structure that combines elements of a partnership and a corporation. It offers the owners, also known as members, protection from personal liability – much like a corporation – but with tax benefits and operational flexibility like a partnership. This means the members are not personally responsible for the company’s debts or liabilities. Additionally, profits and losses can pass directly to the members without taxation; the members then report this on their personal tax returns.

Related Questions

1. How do you form an LLC?

To form an LLC, you must first select a unique name that complies with your state’s laws. You then file the Articles of Organization and pay the filing fee. The operating agreement is drawn up next to consolidate rules for the company’s operation and ownership. Finally, you obtain an EIN from the IRS for tax purposes.

2. What are the advantages of an LLC?

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An LLC grants personal liability protection for the owners, flexibility in management, and fewer administrative duties compared to corporations. It also allows for pass-through taxation which can prevent double taxation.

3. Are there any disadvantages to an LLC?

A few potential drawbacks of an LLC include self-employment taxes, limited growth potential due to difficulties raising capital, and being subject to foreign qualifications if operating in more than one state.

4. Who can be a member of an LLC?

An LLC member can be an individual, a corporation, a foreign entity, or even another LLC. There isn’t typically a limit to the number of members an LLC can have.

5. Can an LLC have only one member?

Yes, an LLC can have only one member. This is referred to as a single-member LLC. The member enjoys the same advantages as a multi-member LLC including liability protection and pass-through taxation.