An LLC, or Limited Liability Company, is a business structure in the United States that combines limited liability protection with the tax flexibility of a partnership. It protects the personal assets of its owners (called members) from being pursued for the company's debts or liabilities, meaning members typically are not personally liable for business debts or lawsuits. LLCs allow profits and losses to pass through to members' individual tax returns, avoiding double taxation that corporations often face.
How an LLC Works
- LLCs are formed by filing articles of organization with the state, and the rules vary by state.
- Owners are called members, and membership is generally open to individuals, corporations, other LLCs, and foreign entities, with exceptions like banks and insurance companies.
- LLCs offer flexibility in taxation: by default, they are pass-through entities taxed like partnerships or sole proprietorships, but they can elect to be taxed as corporations.
- LLCs provide limited liability, meaning creditors can usually only claim business assets, not personal assets, protecting members' personal properties.
- Wages paid to LLC members are business expenses deductible from revenue.
- LLCs combine features of corporations (liability protection) and partnerships (tax treatment and operational flexibility).
Summary
An LLC is a popular choice for small to medium businesses that want liability protection without the complexity and double taxation of corporations. It provides a straightforward way to separate business finances from personal assets while maintaining flexibility in how income is taxed and distributed.
