The limited liability company (LLC) business structure became popular during the 1990s. An LLC provides owners with limited liability protection, as well as flexibility in terms of taxation and management structure. In that way, an LLC business structure includes characteristics of a corporation, as well as a partnership.
The owners of an LLC are referred to as members of the company. An LLC may be owned by a single member, or an unlimited number of members. According to the IRS website, a member of an LLC may include an individual, corporation, another LLC, partnerships and other foreign entities. Generally, businesses that provide banking or insurance services are prohibited from forming an LLC.
A key feature of an LLC involves limited liability. As explained on The Lectric Law Library website, members of an LLC are protected from debts of the company. However, an LLC member that makes a guarantee to a lender may be liable for that particular loan. Generally, the business creditors of an LLC may not pursue the personal assets of an LLC member in an effort to collect a business debt.
An LLC formation occurs by filing articles of organization, or a certificate of formation, with the state. In many instances, articles of organization must be filed with the Secretary of State's office. Many states provide fill-in the blank articles of organization by mail, online or in person. Many states require an LLCs articles of organization to provide information such as the company's name and location, as well as the names and addresses of LLC members. LLCs must include the name and address of an adult, or a business that will accept legal documents for the LLC. All states charge a fee to file articles of organization, which varies from state to state.
The federal government treats an LLC as a pass-through entity by default. As explained on the IRS website, since an LLC doesn't have a federal tax classification, LLCs may file as a sole proprietor, corporation or a partnership. More often than not, an LLC will elect to get taxed as a partnership, or as a sole proprietorship in the case of a single-member LLC. This feature allows an LLC member to pass his share of company profits or losses to his individual or joint tax return. The ability to pass-through profits and losses to a personal tax return allows an LLC to avoid double taxation.
LLCs have flexibility in terms of choosing a management structure for the business. An LLC may choose to be member-managed or manager-managed. LLCs that are managed by members of the LLC who oversee the company's daily operations have an operational similarity to that of a partnership. An LLC that selects non-member managers to control the daily activities of the company appears to operate closer to the business structure of a corporation.