What is a limited liability company?
A limited liability company, commonly called an “LLC,” is a business structure that is similar to a corporation, but less formal. Business owners form LLCs to protect themselves from being personally liable for business debts.
LLCs combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. As in a partnership or sole proprietorship, income “passes through” the LLC to the LLC owners, and the owners report the business’s income on their personal income tax returns. Unlike a corporation, the LLC itself is not a separate taxable entity.
Like owners of a corporation, however, all LLC owners are protected from personal liability for business debts and claims—a feature known as “limited liability.” This means that if the business owes money or faces a lawsuit for some other reason, only the assets of the business itself are at risk. Creditors usually can’t reach the personal assets of the LLC owners, such as a house or car. (However, both LLC owners and corporate shareholders can lose this protection by acting illegally, unethically, or irresponsibly.)
For these reasons, many people say the LLC combines the best of partnerships and corporations.
The decision to form an LLC is an important one. Like a corporation, an LLC is meant to be a permanent legal entity, and it will exist—and incur taxes and fees, whether or not you are actively operating a business—until you take legal steps to dissolve it.