How LLCs Work

A limited liability company (LLC) cannot issue stock. An LLC is an entity structured to have single or multiple owners, who are referred to as members. Members can be added and subtracted over the life of the LLC, and profits are able to be distributed by varying amounts to each of the members.

Members are bound as owners by a signed partnership agreement instead of through stock issuance or option grants. Since no stock is issued to the members of an LLC, the entity is taxed as a pass-through entity. Each member of the LLC reports his share of the entity's profits on his personal income statement in the form of income, but the corporate entity itself incurs no taxes. This is unlike a C corporation or S corporation that issues stock, and whose members are double-taxed. Profits from these types of corporations are taxed at the corporate level, and then any after-tax profits are distributed to shareholders and taxed as capital gains on their personal tax returns.

A lot of the same liability benefits of a C corporation or S corporation can be realized with an LLC. Each member of an LLC is protected against any debt taken on by the corporate entity and is protected against any potential lawsuits that may arise during normal business operations. This means all personal assets of the members of an LLC, both tangible and financial, are protected by tax law.