What is an “LLC”?

Let’s start with the acronym: “LLC” stands for Limited Liability Company. As the name suggests, an LLC is a business structure that provides limited liability, or financial obligations, to its owners. It’s been described as a hybrid legal structure that combines the pass-through taxation benefits of a partnership or sole proprietorship with the limited liability of a corporation (the best of both worlds).

Pass-through Taxation

Unless the LLC elects to be treated as a C Corporation for federal tax purposes, the LLC itself is not a separate taxable entity. Instead, LLC owners report business profits or losses on their personal income tax returns. This is referred to as “pass-through taxation.”

Limited Liability

Owners of LLCs are protected from personal liability for business debts and lawsuits. What does this mean? Basically, if your business is sued, or owes money, only assets that belong to the business (such as corporate bank accounts and company property) are at risk. Creditors can’t go after your home, personal accounts, or other personal property.

The Limits of Limited Liability

There are exceptions to the reach of limited liability protection. If you or your partners act illegally, unethically or irresponsibly, the limited liability afforded by an LLC can be disregarded by a court.

Single or Multiple Owners

A single person (or entity) or multiple individuals (or entities) can own an LLC. Owners of an LLC are referred to as “members”.

LLCs vs. Corporations

Corporations provide limited liability as well — but, unlike LLCs, corporations are taxed as separate business entities. LLCs allow profits and losses to be “passed through” the business, to its individual members. This is a key difference between the two entity types.

Professional Limited Liability Companies (PLLCs)

Some states require businesses that provide professional services requiring a state professional license, such as legal or medical services, to form a Professional Limited Liability Company, or PLLC, instead of an LLC. Typically a PLLC may only be owned by licensed professionals (i.e. only lawyers can own a PLLC law firm).

LLC Taxes

The federal government (the IRS) does not have a tax classification for LLCs; so all LLCs must file their tax returns under an existing category (i.e. corporation, partnership, or sole proprietorship). In some cases, your LLC may benefit from requesting S Corporation status.

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