The limited liability company, or LLC, is a popular business entity type among entrepreneurs and small business owners because of its liability protection and flexibility both in terms of tax treatment and operation. While the laws governing LLCs are set forth in statutes that vary from state to state, there are several common characteristics that apply in all jurisdictions.
Separate Legal Existence
One key characteristic of an LLC is that it has a separate legal existence apart from its members. While any group of people can operate a business together in an unincorporated partnership, they remain a collection of individuals who own property and incur debt. An LLC is a separate legal entity: it can buy and sell property, hire employees, institute lawsuits and retain attorneys to defend claims against it. Although state law regarding LLC operation varies, an LLC can usually continue existing even after a member withdraws.
As the name suggests, an LLC offers limited liability to its members. Although members, managers and employees remain responsible for their own torts, or civil wrongs, an LLC member is protected from liability for torts committed by other members, managers or employees. This feature allows members the freedom to hire employees and conduct high-liability business that would otherwise put the members' personal assets at risk in a lawsuit.
Flexibility in Taxation
LLCs are also characterized by flexibility in terms of how they are taxed. The IRS does not have a separate category for LLCs, so these entities are taxed as either sole proprietorships -- in the case of single-member LLCs -- partnerships -- for multi-member LLCs -- or corporations -- single or multi-member organizations. Within the corporations category, members can choose to be taxed as either a Subchapter S corporation or a Subchapter C corporation -- otherwise known as S-corp and C-corp -- which refers to the set of IRS corporate taxation rules the corporation chooses. This flexibility gives members the ability to choose the form of taxation that makes the most sense for the business.
Simplicity in Documentation and Operation
While a separate legal existence, limited liability and flexible tax treatment are all important LLC features, these entities are also characterized by simplicity in terms of documentation and operation. Most states do not require an annual shareholders' meeting and the attendant preparation and filing of minutes of that meeting. LLC members, unlike shareholders in a corporation, are also generally not required to appoint a board of directors to run the company. Recordkeeping is also much less burdensome than with corporations.
- Jupiterimages/BananaStock/Getty Images