Limited Liability Company (LLC)
What it is:
A limited liability company (LLC) is a type of business entity formed that can be taxed like a partnership but protects its shareholders from liability beyond their investment.
How it works/Example:
Investors can decide to set up any type of legal business structure they like. However, if they want to protect themselves from additional liability beyond their own investment, a LLC is a likely choice. It offers the benefit of being treated by the IRS like a partnership. Some of the other major attributes of this type of business entity also include more flexibile management style and fewer formalities required by state law.
Most states require the LLC to submit one document; the Articles of Organization which is to be filed with the Secretary of State. Owners of a LLC are referred to as members. Once members decide on a LLC, they should file an operating agreement with the state that delineates how the LLC will be run, how members are obligated financially, and how the profits and losses are to be allocated. In the absence of this agreement, the state courts would then decide how to allocate profits and losses.
Why it matters:
For shareholders who wish to shield other personal assets from creditors, this form of organization is a likely choice. Also, those who wish to avoid double taxation of their dividends should consider this type of organization. Unlike an S corporation, there is no limit on the number of shareholders, and members cannot transfer their interest to someone else without the permission of the other members in most states. Unlike corporations, they are not required to maintain a Board of Directors or Officers.