LLC Overview

LLC characteristics are the unique qualities of an LLC, or limited liability company, that distinguish it from other business types, such as corporations, partnerships, and sole proprietorships. The basic definition of an LLC is that of an unincorporated company that combines the qualities of a partnership and a corporation. The most distinguishing quality from a partnership that an LLC takes is pass-through taxation, while the most distinguishing quality from a corporation is limited liability protection. Taken together, these qualities make for a business structure that has special appeal for small business owners and entrepreneurs.

Limited Liability of LLCs

One of the most appealing features of LLCs is the limited liability protection they enjoy. Limited liability means that in general a member of an LLC cannot be held personally liable for debts or legal rulings related to their company. Their personal investment in the company may be at risk, but not their personal property, such as their home, car, or bank account. Limited liability allows business owners to conduct high liability business without fear for their personal assets being at risk. That said, there are some situations in which limited liability will not offer protection, such as with fraud or failure to meet reporting and legal requirements.

In a similar vein to limited liability, operating an LLC will also mean that from a legal point of view, one’s business dealings are considered separate from one’s personal dealings. What this means is that an LLC is considered to be a legal entity apart from the member or members who own it, and such an entity can hire employees, purchase and sell property, and bring legal action to court or defend itself in court. All such actions will be done in the name of the company, not the individuals. In contrast, if one is in an unincorporated partnership, their will be no overarching legal entity to separate them from their dealings.

Taxation Advantages for LLCs

As far as taxation is concerned, there are two main advantages with an LLC. The first is their taxation flexibility, which means that one can choose how they would like their LLC to be taxed by the IRS, since the IRS does not consider an LLC to be a separate tax category. To accommodate this, one must instead choose to be taxed as:

  • A sole proprietorship, if one is operating a single-member LLC.
  • A partnership, if one is operating a multi-member LLC.
  • A corporation, if one is operating either a single-member or multi-member LLC.

Such flexibility allows one to have the type of taxation that is most beneficial to their business, which may be a great advantage, but many consider the second main advantage—pass-through taxation—to be even more appealing.

Pass-through taxation is a form of taxation borrowed from partnerships and sole proprietorships, and with it one’s profits or losses are passed through from the business level to their personal tax return, which is the only tax return on which they will be taxed. Thus, with pass-through taxation, one avoids the double taxation that corporations must deal with, which can be a distinct advantage, especially for small businesses.

Operation Flexibility for LLCs

Just as one enjoys taxation flexibility with an LLC, so too will one enjoy operational flexibility, meaning that they will have much more freedom in how their LLC is set up and run than they would with a corporation. Unless an LLC is manager-managed, it will be run by the owners, who are known as members. The freedoms related to membership include:

  • No limit on how many members there may be.
  • Any member may participate in the running of the business.
  • A member may include individuals, corporations, and other LLCs.
  • A member may assign their interest in the company to another entity as long as they notify the appropriate state department.

In contrast, corporations are required to have shareholders, a board of directors, and officers to run the business.

Reduced Administration for LLCs

Similarly, LLCs enjoy less administrative requirements than corporations. While corporations are required to hold regular board meetings, keep records, and file more paperwork, LLCs have almost no such requirements. One requirement they do have though is to keep a registered agent to accept and send legal papers on behalf of the company, and this agent must maintain an address within the state the LLC is registered in.

These are just the most prominent characteristics that define an LCC. If you need further help understanding LLC characteristics, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.