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What is an LLC?

Although often called a “limited liability corporation,” an LLC is more properly termed “limited liability company.”  LLC’s are fictitious legal business entities with certain properties that make them advantageous for flexible, non-public business ownership.  They are typically used by small businesses, and can be created by sole proprietors, but they can grow quite large.  (Some LLC’s have hundreds of thousands of employees)

The owners of an LLC are called members, and the number of members that an LLC can have is unlimited.  The LLC can distribute profits among the members in any way that they choose.  Unlike other corporations, LLC’s have no need to record minutes or business meetings in their records.  As a result, much less administrative paperwork is needed.  The LLC is less permanent than other corporations; bankruptcy, or the death of its members can result in the termination of the LLC (corporations, by contrast, can last perpetually.)

As implied by the name, members of a limited liability company are protected from some or all of the corporation’s liability, depending on the state in which they are registered.  Some states charge a franchise tax or capital values tax on LLC’s as a form of state fees.

Members of LLC’s enjoy pass-through taxation, meaning that the profits of the company pass through to the members who are then taxed on either wages, salary or profit sharing.  The LLC must file a tax return of its own, even though it doesn’t have to pay anything.  (The exception to this is if the company files as a C-corp.)  A limited liability company cannot go public; because of this limitation, it is often wise for small entrepreneurs wishing to put up the with slight extra hassle of an S-corp instead.

To create an LLC, all that is needed is for articles of organization, which can be created by the members or a lawyer, to be filed with the secretary of state and to pay the applicable fees.  Though not necessary, most LLC’s include an operating agreement, outlining the responsibilities and shares of the members.  Specific formation requirements vary from state to state.

This Business article was written by Mark Karavan on 10/22/2009

What is a limited liability company, (LLC) and how do I form one?