Key Takeaways

  • An LLC (Limited Liability Company) is a legal business structure combining elements of corporations and partnerships, offering liability protection and tax flexibility.
  • LLCs can be single-member or multi-member, and managed either by members or appointed managers, as outlined in the operating agreement.
  • Key advantages include limited liability, pass-through taxation, operational flexibility, credibility, and fewer compliance requirements compared to corporations.
  • Disadvantages include self-employment taxes, difficulty attracting some investors, limited lifespan in some states, and potential delays in tax filing due to K-1 forms.
  • LLCs can choose their tax classification (sole proprietorship, partnership, S corporation, or C corporation) and are suitable for a wide range of business types.
  • Industry-specific regulations, state requirements, and operating agreements play a critical role in how LLCs are structured and managed.

If you've ever wondered, "what are LLCs," the definition of an LLC, or limited liability company, is a type of business structure where the members of the company aren't personally liable for any debts or liabilities of the company. It has many similarities to a corporation, such as having flow-through taxation to the LLC members. When an LLC is run by more than one person, the people involved are known as members.

Introduction to LLCs

There are several advantages to a company forming a limited liability company. Having an LLC protects a company against potential lawsuits, decreases the amount of paperwork that other types of businesses have, makes the company look more credible, and lets the company avoid being taxed twice.

A single-member LLC has one owner, while a multi-member has more than one owner. When a limited liability company is managed by the members, it's known as a member-managed LLC. If a manager is elected to handle the daily operations of the company, the LLC is called a manager-managed LLC. How the company is run will be laid out in the operating agreement. This is the internal agreement that all the limited liability companies agree on.

A limited liability company is only one of a few different types of business structures. Other types include the following:

An S corporation isn't a business structure, but a tax designation. Corporations, LLCs, and partnerships can decide to be taxed as an S corporation. Small companies will enjoy the simplicity and personal liability protection that an LLC offers. It will protect personal assets of the members if the company gets sued. LLCs are easy to maintain and create, and there is no have double taxation.

How LLCs Work

An LLC operates as a separate legal entity from its owners, meaning the company itself can own property, enter into contracts, and be responsible for its own debts and obligations. Owners, known as members, contribute capital, assets, or services to the business in exchange for a membership interest. The LLC can be formed for almost any lawful purpose, from running a small retail shop to holding real estate investments.

An LLC’s structure allows for flexibility in day-to-day management. Member-managed LLCs give all owners a direct role in decision-making, while manager-managed LLCs appoint one or more individuals (who may or may not be members) to handle operations. The details of management authority, profit distribution, voting rights, and procedures for adding or removing members are typically outlined in the operating agreement.

LLCs must comply with state-specific formation requirements, such as filing Articles of Organization and paying applicable fees. While federal law governs taxation, each state may have its own rules for reporting and compliance, including annual reports and franchise taxes.

Advantages of an LLC

LLC owners are protected from the company's lawsuits and debts, with the exception of criminal behavior or fraud. There is also pass-through taxation, which means the company's profits go to its owners, who will then report them on their personal tax returns. Only being taxed once is a huge advantage to having a limited liability company. On the other hand, C corporations can be subject to double taxation.

There are no formal officer roles with LLCs, and they don't need to record company minutes or hold yearly meetings. There are several restrictions on how an LLC can be managed and owned. The LLC can either be owned by one member or multiple members. Creating an operating agreement is recommended for LLCs that have multiple members, as this will decrease the risk of conflict in the future. The company can also choose how it wants to get taxed to see if an S corporation or a C corporation is more beneficial. It also looks more credible being an LLC.

A limited liability company is considered more of a formal business structure than a partnership or a sole proprietorship. The company can start to build credit history once it's formed so it'll be able to access higher loans and bigger lines of credit in the future. Owners do not need to be permanent residents or citizens of the United States.

Types of LLCs

LLCs come in various forms to suit different business needs:

  • Single-Member LLC – Owned by one person or entity, providing liability protection while being taxed like a sole proprietorship.
  • Multi-Member LLC – Owned by two or more members, typically taxed like a partnership unless another election is made.
  • Professional LLC (PLLC) – Designed for licensed professionals such as doctors, lawyers, and accountants; certain states require this structure for regulated professions.
  • Series LLC – Available in select states, allowing one LLC to establish separate “series” or divisions, each with its own assets, liabilities, and members.
  • Low-Profit LLC (L3C) – Created for businesses with a charitable or educational purpose, combining elements of for-profit and nonprofit entities.

Each type has unique benefits and restrictions, and the choice often depends on the industry, liability concerns, and growth plans.

Disadvantages of an LLC

There are many benefits to having pass-through taxation, but there are also some disadvantages. Since LLCs are pass-through entities, the owners are in charge of paying taxes on their percentage of the LLC. It does not matter if they are given a disbursement or not. All the members of the LLC also need to wait until K-1 tax forms are sent out to finish their taxes, which can delay the process. Many investors will not fund limited liability companies.

Shares of stock can't be issued in order to attract investors. All earnings of the LLC are subject to self-employment tax. There is also tax recognition of assets that are appreciated. This might happen if a company that already exists converts to an LLC. Sometimes there is a limited life of the limited liability company, which means the company won't exist anymore if an owner leaves or dies. These are just several disadvantages to keep in mind.

Taxation Options for LLCs

One of the most appealing features of an LLC is the flexibility in how it can be taxed:

  • Default Taxation – A single-member LLC is taxed as a sole proprietorship, and a multi-member LLC is taxed as a partnership. Profits and losses pass through to members’ personal tax returns.
  • S Corporation Election – LLCs can elect S corp status with the IRS to potentially reduce self-employment taxes, provided they meet specific requirements.
  • C Corporation Election – Less common, but may benefit LLCs looking to retain earnings within the company or attract certain investors.

While tax flexibility is an advantage, it also requires careful planning to choose the most beneficial status. Business owners should consider factors like income level, reinvestment plans, and potential deductions when making the decision.

Frequently Asked Questions

  1. What are LLCs in simple terms?
    An LLC is a business structure that protects owners’ personal assets from business debts while offering flexible management and tax options.
  2. How is an LLC different from a corporation?
    An LLC offers fewer formalities, pass-through taxation by default, and more flexible management, while corporations have stricter compliance and may face double taxation.
  3. Do LLCs pay less tax than other business types?
    Not necessarily; while LLCs avoid corporate double taxation, members pay self-employment tax on earnings unless electing a different tax status.
  4. Can anyone form an LLC?
    Most individuals and business entities can form an LLC, though certain industries and professional services may require special licensing or PLLC status.
  5. Does an LLC expire?
    In some states, an LLC has a limited lifespan unless renewed or extended, and it may dissolve if a member leaves unless otherwise stated in the operating agreement.

If you need help with determining what is an llc license, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. 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.