Ruth Rachel A. answered • 07/25/23
JD/MBA with Intl Experience in both the Private and Public Sectors
A Limited Liability Company, or LLC, is a private legal entity in the United States which enables one to protect their personal assets by legally separating them from their business assets. Although LLCs provide for limited liability protection like Corporations, they are not Corporations; LLCs are "unincorporated business associations" which do not have a distinctly separate tax structure. LLCs combine the limited liability protection of Corporations and the flexibility in management structure and tax advantages of Partnerships.
The formation of LLCs is governed by state law, namely the Limited Liability Company Act of the state in question.
1) Limited Liability Protection
Owners of an LLC — whether individuals or other legal entities — are called "Members".
Members of an LLC invest in the business organization created. Business assets are owned by the LLC, and not its Members. Any liability which the LLC may encounter during the normal course, such as a legal judgment against the LLC ordering it to pay damages, is solely the liability of the LLC, the legal entity, and not its Members. The personal assets of the Members — bank accounts, homes, cars, or even corporate assets, as the case may be — cannot be seized in order to satisfy any such liability held by the LLC.
As long as the Members of the LLC keep their personal assets and business assets held in the LLC separate, this limited liability protection remains, save certain exceptions permitting one to "pierce the veil" of the LLC, which are outside of the scope of the present response. (Please note that the law in respect of liability protection and "piercing the veil" is rapidly evolving today for single-Member LLCs, and may now vary significantly from state to state.)
2) Flexibility in Management Structure
Corporations generally have a centralized management structure in the form of a Board of Directors comprised of corporate Directors and Officers, with limited approval required by Shareholders in the case of certain major business decisions, such as mergers.
LLCs, on the other hand, may have either centralized or decentralized management structures, as is the case for Partnerships.
Members of an LLC hold a "membership interest" in the entity formed, which may be expressed generally or in terms of a determined percentage of membership interest in an LLC, or broken down into the ownership of specific "membership units", or "shares", in an LLC.
Whatever the ownership structure defined by an LLC's Operating Agreement, LLCs may be managed by all of their Members (a decentralized management structure), some of their Members (a centralized Member management structure), or even by non-Members (a centralized non-Member management structure). The choice of an LLC's management structure is left completely to its Members, as defined by the Operating Agreement.
3) Tax Advantages
Like Sole Proprietorships and Partnerships, LLCs do not have a distinctly separate tax structure. We refer to such business entities as "pass-through" entities because they do not pay federal income tax in their own right: net profits or losses for the year "pass through" to the individual income tax returns of their Owners.
Thus, the Members of an LLC do not have to file a separate business tax return for the LLC, and are able to offset any net business losses of their LLC against taxable earnings in their individual tax returns, lowering their individual tax burdens.
Thus, the Limited Liability Company, or LLC, remains as one of the most effective and beneficial business structures for Owners seeking to protect substantial personal assets, conducting higher-risk business activity in the normal course, or desiring to minimize their tax exposure.
