What is a 'Limited Liability Company - LLC'

A limited liability company (LLC) is a corporate structure whereby the members of the company cannot be held personally liable for the company's debts or liabilities. Limited liability companies are essentially hybrid entities that combine the characteristics of a corporation and a partnership or sole proprietorship. While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of an LLC is a feature of partnerships.

BREAKING DOWN 'Limited Liability Company - LLC'

Although LLCs have some attractive features, they also have a number of disadvantages, especially in relation to the structure of a corporation. A LLC has to be dissolved upon the death or bankruptcy of a member, unlike a corporation, which can exist in perpetuity. Also, a LLC may not be a suitable option when the objective of the founder is to eventually become a publicly listed company.

Protections of a Corporation

The primary reason an LLC is selected as an ownership structure is to limit the principals' personal liability. An LLC is often thought of as a blend of a partnership, which is a simple business formation of two or more owners under an agreement, and a corporation which is afforded certain liability protections. An LLC is a more formal partnership arrangement requiring articles of organization to be filed with the state. An LLC is much easier to set up than a corporation, and it provides more flexibility along with the protection. However, creditors may be able to pierce the corporate veil of an LLC in cases of fraud or when legal and reporting requirements haven’t been met.

Flexibility of a Partnership

The primary difference between a partnership and an LLC is that an LLC is designed to separate the business assets of the company from the personal assets of the owner, which has the effect of insulating the owners from the LLC's debts and liabilities. An LLC functions similar to a partnership in that the profits of the company pass through to owners’ tax return. Losses can be used to offset other income, but only up to the amount invested. The LLC only files an informational tax return.

In terms of the sale or transfer of the business, a business continuation agreement is the only way to ensure the smooth transfer of interests when one of the owners leaves or dies. Absent a business continuation agreement, an LLC must be dissolved in the event of a bankruptcy or the death of a partner.

RELATED TERMS
  1. LLC Operating Agreement

    An LLC Operating Agreement is a document that customizes the ...
  2. Company

    An entity formed to engage in a business. A company may be organized ...
  3. Limited Entrepreneur

    A person who is involved in a limited liability company but does ...
  4. Limited Company - LC

    A form of incorporation that limits the amount of liability undertaken ...
  5. Limited Liability

    A type of liability that does not exceed the amount invested ...
  6. Partnership

    A business organization in which two or more individuals manage ...
Related Articles
  1. Investing

    The Basics of Forming A Limited Liability Company (LLC)

    An LLC is a good combination of protection with flexibility and tax benefits. It provides an array of taxation alternatives while shielding individual members from personal liability.
  2. Small Business

    Which Type of Organization Is Best For Your Business?

    Learn the differences between the types of business organizations so you can determine how to best structure your business for tax and liability limitations.
  3. Retirement

    Using an LLC for Estate Planning

    An LLC is a powerful tool for estate planning. By establishing a family LLC, parents can distribute assets to their children with significant tax savings.
  4. Insurance

    Real Estate Trust or LLC? Helping Landlords Choose

    Once you’ve bought property, are you protected legally against the liabilities that come with renting it out? Here's how to make sure you're covered.
  5. Investing

    Wyoming State Now Offers Instant LLC Registration

    It is now possible to form a limited liability company (LLC) directly on the Wyoming Secretary of State's website.
  6. Taxes

    S Corp. Vs. LLC: Which Should I Choose?

    Understand the major distinctions between an S corporation and an LLC, and the important factors to consider when choosing your business structure.
  7. Small Business

    What is Unlimited Liability?

    Unlimited liability means that the owners of a business are liable for the entire amount of debt and obligations of that business.
  8. Taxes

    Become an LLC and Save Taxes Under Trump (Maybe)

    If President Trump gets the tax reform bill he wants, LLCs may be able to reduce their taxes – but not in the way you might think.
  9. Insights

    Limited Liability Partnership (LLP): The Basics

    LLPs are a flexible legal and tax entity that allows partners to benefit from economies of scale by working together while also reducing their liability for the actions of other partners.
RELATED FAQS
  1. Can a Limited Liability Company (LLC) issue stock?

    Learn about a limited liability company, or LLC, and if it is able to issue stock. Understand the benefits of an LLC, both ... Read Answer >>
  2. How do I set up a Limited Liability Company (LLC)?

    Learn about the main steps in forming an LLC, including filing the articles of organization and drafting an operating agreement. Read Answer >>
Hot Definitions
  1. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
  2. Collateral Value

    The estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal ...
  3. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  4. Current Account

    The difference between a nation’s savings and its investment. The current account is defined as the sum of goods and services ...
  5. Liability

    Liabilities are defined as a company's legal debts or obligations that arise during the course of business operations.
  6. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
Trading Center