What is a Limited Liability Company (LLC)?

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What is a Limited Liability Company (LLC)?

A Limited Liability Company ("LLC") is a relatively new entity that has emerged in recent years as an attractive vehicle to facilitate business relationships and transactions. State laws regarding LLCs are designed to achieve what is seemingly a simple concept — to permit persons or entities ("members") to join together in an environment of private ordering to form and operate the enterprise under an LLC agreement with tax benefits akin to a partnership and limited personal liability akin to the corporate form.

LLCs are very popular because owners of LLCs have limited personal liability for the debts and liability of the business (similar to shareholders of a corporation). In addition, LLCs provide management flexibility and the benefit of pass-through taxation, similar to features of a partnership.

The owners of an LLC are referred to as “members.” The “members” could be individuals, other LLCs, corporations or even foreign entities. Most states do not place a number requirement for membership of LLCs and an LLC could have only one member or copious members.

However, most states prohibit certain businesses from being formed as LLCs – such as banks and insurance companies.

Advantages and Disadvantages of LLCs:

Advantages of LLCs include, but are not limited to, the following:

Members of LLCs have limited personal liability for the debts and other liabilities of the business;
Unlike corporations that must hold regular board of directors and shareholder meetings and maintain written corporate minutes, laws governing LLCs generally do not require such stringer formalities.
Unlike corporations that generally use accrual method of accounting, LLCs can use the cash method of accounting under which income is not considered earned until it is actually received.
The IRS rules permit LLCs to file tax returns as a corporation, partnership or sole proprietorship.

The disadvantages of LLCs include, but are not limited to, the following:

LLCs are generally more expensive to form than sole proprietorships and partnerships.
Profits and income from LLCs are subject to social security and medicare taxes.
The profits of an LLC must immediately be realized for tax purposes.