Limited liability company

: This article relates to the United States see Limited company for United Kingdom equivalent.

Related Topics:
United States - Limited company - United Kingdom

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A Limited liability company (denoted by L.L.C. or LLC) is a type of legal entity which has only relatively recently been made possible to establish in the United States and many other, mainly anglophone, countries. An LLC is similar to a corporation and a limited liability partnership. A variant of the LLC available in some jurisdictions, typically limited to licensed professionals such as lawyers or engineers, is the professional limited liability company (denoted by "P.L.L.C." or "PLLC").

Related Topics:
Legal entity - United States - Anglophone - Corporation - Limited liability partnership

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The concept of an LLC was apparently modelled after the German GmbH (Gesellschaft mit beschränkter Haftung; LLC is a broad translation of the term). These have existed in German-speaking countries for some time?in Germany itself since 1892. The concept was adopted by many English-speaking countries because LLCs have some advantages over corporations. It is sometimes said that an LLC is "kind of a 'light' version of an Inc. or Ltd." This is a generalisation, however, and may be misleading or wrong in some cases.

Related Topics:
GmbH - 1892 - Inc. - Ltd

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Basically, an LLC allows for the flexibility of a sole proprietorship or partnership structure within the framework of limited liability, such as that granted to corporations. An advantage of an LLC over a limited partnership is that the formalities required for creating and registering LLCs are much simpler than the requirements most states place on forming and operating corporations; because of the lack of requirement for annual meetings of shareholders (LLCs have "members") or bylaws, for instance - however, most LLCs will choose to adopt an Operating Agreement or Limited Liability Company Agreement to provide for the governance of the Company, and such Agreement is generally more complex than a corporation's bylaws. Note, too, that some states such as New York require an operating agreement.

Related Topics:
Partnership - Limited liability - Corporation

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For purposes of U.S. tax law, a curious feature of the LLC--a feature unknown to many business people and even some accountants--is that an LLC can elect how it should be treated for federal and often for state income tax purposes. An LLC with one owner, for example, is treated as a sole proprietorship by default but this one owner LLC can also elect to be treated as a C corporation or as an S corporation. Further, an LLC with more than one owner is treated as a partnership by default but a multiple owner LLC can also elect to be treated as a C corporation or as an S corporation. To elect C corporation treatment, an LLC files a form 8832 with the IRS. To elect S corporation treatment, an LLC files a form 2553 with the IRS.

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One reason that businesses choose to be organized as an LLC is to avoid "double taxation." A traditional corporation is taxed on its income, and then when the profits are distributed to the owners of the corporation (i.e., the shareholders), then those dividends are also taxed. With an LLC, income of the LLC is not taxed, but each owner of the LLC (i.e., each member) is taxed based on its pro rata allocable portion of the LLC's taxable income, regardless of whether any distributions to the members are made. This single level of taxation can lead to significant savings over the corporate form. Similarly, under some circumstances, members of an LLC may deduct losses of the LLC on their personal tax returns.

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Another reason that businesses choose to be organized as an LLC is to exploit the tax classification flexibility that LLCs allow. A new business experiencing losses might choose to operate as a sole proprietorship or partnership in order to pass through those losses to the owners. A slightly more established business might operate as an S corporation to save on self-employment taxes. A large mature business with many owners might operate as a C corporation.

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