Limited liability company definition
/What is a Limited Liability Company?
A limited liability company (LLC) is a business entity that provides its owners with the limited liability protection of a corporation, while allowing earnings to pass through to the owners for tax purposes. Thus, an LLC combines the best features of a corporation and a partnership while not being classified as either one. Instead, it can be best characterized as an unincorporated association that requires much less paperwork than a corporation.
A limited liability company is frequently used when there are few owners, or just one owner. An LLC is not allowed in some states for certain purposes, such as the provision of professional services.
Advantages of a Limited Liability Company
There are numerous advantages to using a limited liability company, including the following:
Limited liability protection. Owners are not personally liable for the company’s debts or liabilities.
Flexible taxation options. LLCs are not taxed as separate entities by default; profits and losses can pass through to members and be reported on their personal tax returns (avoiding double taxation).
Operational flexibility. LLCs are not required to have a formal structure like a board of directors or annual meetings, as corporations do.
Ease of formation. LLCs are generally simpler and less costly to set up than corporations.
Profit-sharing flexibility. Members have the freedom to distribute profits in a way that doesn’t strictly follow ownership percentages (if stated in the operating agreement).
Unlimited membership. Unlike S corporations, which have restrictions on the number and type of shareholders, LLCs can have unlimited members and may include individuals, corporations, and even foreign entities.
Fewer ownership restrictions. Members can be individuals, corporations, or other LLCs, providing great flexibility in ownership structures.
Ownership continuity. In many states, LLCs can continue to exist even if a member leaves or passes away, as long as provisions for continuity are in place in the operating agreement.
By offering liability protection, tax flexibility, and operational ease, LLCs provide an attractive balance between the simplicity of a sole proprietorship and the structure of a corporation.