A limited liability company (LLC) is a hybrid entity combining the ownership structure of partnerships with the liability protections of corporations. LLCs provide their owners and employees personal legal protection from the actions of the company, while still allowing them to invest and take "pass through" profits. LLC owners are called members — the terms are interchangeable.
Corporations as Members
Unlike traditional partnerships, LLCs allow corporations to hold shares of ownership. In part, the less personal term "member" is used to prevent confusion about owners always being individuals. Both individual and corporate members are shielded from liability for the actions of an LLC.
Corporations must pay tax on their profits. When they pass profits along to shareholders, the Internal Revenue Service (IRS) again taxes the profits, through shareholder income taxes. This is known as "double taxation." LLCs remedy this because they are not taxed on their profits. Instead, only members are taxed when they receive profits.
When corporations face losses, they can usually get tax relief as a result. However, shareholders lose stock value and revenue without any tax advantages. LLCs pass both their profits and losses along to members. Therefore, members can claim tax deductions on personal or corporate returns because of the poor performance of their LLC.
In most states, LLC rules are fairly flexible. There can be any number of members, and members can personally manage their companies. States do not typically require a full list of members, only points of contact. However, initial members must file articles of organization with their state's secretary of state to create their new business entity.