What is the Definition of a Limited Liability Company?

by Ben Bontekoe

Overview

A limited liability company (LLC) is a business structure that provides the protection from personal liability of a corporation with the tax advantages of a partnership or sole proprietorship. While all states permit LLCs, the laws vary slightly in different states.
Function

You form an LLC by filing required documents (often called articles of organization) with the state. Most LLCs also have a formal operating agreement, detailing how the business will be run.

Features

The owners, or members, of an LLC are not liable for the debts or obligations of the company. If the business goes bankrupt or is sued, the members' personal assets are protected.
Benefits

The profits of an LLC "pass through" to the members, who report the income on their personal tax returns, avoiding the double taxation on profits faced by corporations.
Considerations

Because LLCs are a fairly new concept, laws governing them are often changing. Seek legal and tax advice if you are considering forming an LLC.
Warning

A member of an LLC may still be personally liable if they (not the business) are sued or if they personally guarantee a business loan, which is often required by banks.