Limited Liability Company (LLC)

Definition & Meaning:

A Limited Liability Company (LLC) is a business structure allowed by state statute that can be thought of as a hybrid between a corporation and a partnership or sole proprietorship.

It provides its owners, also known as members, with limited liability protection, meaning members are not personally responsible for the company’s debts and liabilities beyond their investment in the LLC.

For instance, if your LLC faces bankruptcy or legal actions, your personal assets, like your house or car, are usually protected.
LLCs are popular among small business owners for their flexibility in management and tax benefits.

Unlike corporations, which must adhere to strict rules regarding management and operations, an LLC allows its members to structure the company as they see fit.

They can be managed by the members, akin to a partnership, or by appointed managers, similar to a corporation. This flexibility means you can tailor the management structure to suit your business’s needs.

One of the key advantages of an LLC is the option for pass-through taxation. This means the LLC itself does not pay taxes on its profits.

Instead, the profits and losses of the business are passed through to the members, who report this income on their personal tax returns.

This avoids the double taxation that can occur with corporations, where both the corporation and its shareholders must pay taxes on profits.

Creating an LLC involves filing the Articles of Organization with the state and paying a filing fee, which varies by state. Additionally, while not always legally required, drafting an operating agreement is highly recommended.

This internal document outlines the operating procedures, financial decisions, and ownership percentages among members.