Limited Liability Company (LLC)

Overview

Stated simply, an LLC combines the advantageous limited liability characteristic of a corporation with the pass-through taxation of a partnership or sole proprietorship. While partnerships and sole proprietorships avoid double taxation as pass-through tax entities, they don’t offer any limited liability protection for owners. Similarly, a corporation offers limited liability protection but the potential of double taxation in a C Corporation. While an S Corporation election creates a pass-through tax entity for a corporation, the tax treatment is not identical to an LLC.

An LLC may be managed solely by the owners, called members, or the members may appoint one or more managers to run the business on a daily basis. An LLC is therefore characterized as member-managed or manager-managed.

An LLC is formed by filing Articles of Organization with the Secretary of State. An LLC allows members considerable flexibility in determining the organization’s management structure. This is accomplished through a written operating agreement among the members to control matters such as how management will be organized, rights of members, allocation and distribution of profits and losses, and transferability of memberships. State LLC Acts provide default provisions that will govern if the members do not enter into an operating agreement or if the operating agreement is silent on a specific matter.

An LLC has several tax classifications to choose from depending on the number of members, their relationship (as husband and wife) and the formation state.