A Limited Liability Company (LLC) is a business structure allowed by state statute that provides liability protection to its owners along with federal tax advantages of pass-through taxation. LLCs are hybrid entities with characteristics of both corporations and partnerships.
Like corporations, LLCs protect their owners’ personal assets from the company’s debts and liabilities. LLC owners or members have no personal liability beyond the money they’ve invested in the business. This insulation encourages investment by limiting financial risk exposure.
On the taxation side, LLCs avoid the double taxation corporations face. Profits and losses pass through the LLC entity and are reported only on the individual members’ personal tax returns at their applicable income tax rates. This allows for greater tax flexibility.
However, LLCs receive the benefit of corporate-like perpetual existence and allowance of multiple classes of membership interests and investment levels among owners. Management can be delegated or members can be actively involved in operations.
LLCs provide more simplicity than corporations in formation, record keeping, and dissolution requirements. They enjoy greater structural flexibility and lack many corporate formalities through default provisions that can be modified in the operating agreement.
While details vary by state, LLCs overall combine the liability protection of a corporation with the pass-through taxation of a partnership in a more flexible and administratively simpler legal entity well-suited for many small businesses and investment ventures.