Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business entity that combines the characteristics of a corporation and a partnership or sole proprietorship. An LLC provides its owners, known as members, with limited liability protection, meaning their personal assets are generally protected from the company’s debts and legal obligations.
An LLC is relatively easy to establish and maintain compared to a corporation. It offers flexibility in management and tax treatment, as LLCs can choose to be taxed as a sole proprietorship, partnership, or corporation. This flexibility allows members to avoid double taxation typically associated with corporations, where both the company and its owners can be taxed on profits.
The key features of an LLC include:
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Limited Liability: Members are not personally liable for the debts or liabilities of the LLC. This means creditors cannot pursue a member’s personal assets to satisfy business debts.
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Tax Flexibility: LLCs can elect how they want to be taxed, either as a pass-through entity (where profits and losses are reported on members’ personal tax returns) or as a corporation.
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Management Structure: LLCs can be managed by members (member-managed) or by appointed managers (manager-managed), allowing for various operational structures.
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Compliance Requirements: While LLCs have fewer formalities than corporations, they still need to comply with state regulations, including filing articles of organization and paying annual fees.
For example, if a small business operates as an LLC and incurs debts it cannot pay, the members are typically not personally responsible for those debts. If the business were sued, only the assets of the LLC would be at risk, safeguarding the personal assets of the members, such as their homes and savings.