A limited liability company (LLC) is a business structure that combines the features of a corporation with those of a partnership or sole proprietorship. It provides limited liability protection to its owners, known as members while offering flexibility in management and taxation.
Here are some key characteristics of a limited liability company:
Limited Liability: One of the primary advantages of an LLC is that it limits the personal liability of its owners (members). This means that the assets of the members are generally protected from the debts and liabilities of the business. When the LLC incurs debts or faces legal action, the members’ assets are typically not at risk beyond their investment in the company.
Flexibility in Management: LLCs offer flexibility in management structure. They can be managed either by their members (referred to as member-managed) or by appointed managers (referred to as manager-managed). This allows the owners to choose a management structure that best suits their needs and preferences.
Pass-through Taxation: By default, LLCs are treated as pass-through entities for tax purposes. This means that the profits and losses of the LLC “pass-through” to the individual tax returns of the members, who then report the income or losses on their personal tax returns. This avoids the issue of double taxation that can occur with corporations, where both the corporation and its shareholders are taxed on profits.
Flexible Profit Distribution: LLCs have flexibility in distributing profits among their members. Unlike corporations, which must distribute profits to shareholders based on the number of shares owned, LLCs can distribute profits in any manner agreed upon by the members.
Limited Life Span: In many jurisdictions, LLCs have a limited life span and may be dissolved upon the death, withdrawal, or bankruptcy of a member. However, some jurisdictions allow for perpetual existence through provisions in the LLC’s operating agreement.