What is a limited liability company?
A limited liability company, commonly called an “LLC,” is a business structure that is similar to a corporation, but less formal. Business owners form LLCs to protect themselves from being personally liable for business debts. LLCs combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. As in a partnership or sole proprietorship, income “passes through” the LLC to the LLC owners, and the owners report the business’s income on their personal income tax returns. Unlike a corporation, the LLC itself is not a separate taxable entity. Like owners of a corporation, however, all LLC owners are protected from personal liability for business debts and claims — a feature known as”limited liability.” This means that if the business owes money or faces a lawsuit for some other reason, only the assets of the business itself are at risk. Creditors usually can’t reach the personal assets of the LLC owners, such as a house or car.
An LLC or a Limited Liability Company is a separate legal entity (business structure) from the owners of the LLC. An owner of an LLC is frequently referred to as member. An LLC is frequently referred to as a hybrid of a corporation and a partnership. The members of a limited liability company are shielded from personal liability and profits and losses may pass directly to the members without taxation of the LLC itself.
The LLC is a distinct business entity. An LLC offers an alternative to partnerships and corporations by combining the corporate advantages of limited liability with the partnership advantage of pass-through taxation. Limited Liability Companies are a relatively new business form in the United States, though they have a long-standing history in Europe. LLCs were first formed in the United States in 1977, and were granted pass-thru tax status by the Internal Revenue Service in 1988. As a result, LLC can elect to be taxed like partnerships, only at the individual level when profits are paid as dividends. This yields a considerable advantage over C corporations, which are subject to double-taxation once at the corporate level, and again at the individual level when profits are paid as dividends to the shareholders. Similar to corporations, LLC shield personal assets from business debt.
