A limited liability company (LLC) is the United States-specific form
of a private limited company. It is a business structure that combines
the pass-through taxation of a partnership or sole proprietorship with
the limited liability of a corporation. An LLC is not a
corporation in and of itself; it is a legal form of a company that
provides limited liability to its owners in many jurisdictions. LLCs
are well-known for the flexibility that they provide to business
owners; depending on the situation, an LLC may elect to use corporate
tax rules instead of being treated as a partnership, and, under
certain circumstances, LLCs may be organized as not-for-profit. In
certain U.S. states (for example, Texas), businesses that provide
professional services requiring a state professional license, such as
legal or medical services, may not be allowed to form an LLC but may
be required to form a similar entity called a professional limited
liability company (PLLC).
2 Flexibility and default rules
3 Income tax
7 See also
A limited liability company (LLC) is a hybrid legal entity having
certain characteristics of both a corporation and a partnership or
sole proprietorship (depending on how many owners there are). An LLC
is a type of unincorporated association distinct from a corporation.
The primary characteristic an LLC shares with a corporation is limited
liability, and the primary characteristic it shares with a partnership
is the availability of pass-through income taxation. It is often
more flexible than a corporation, and it is well-suited for companies
with a single owner.
Although LLCs and corporations both possess some analogous features,
the basic terminology commonly associated with each type of legal
entity, at least within the United States, is sometimes different.
When an LLC is formed, it is said to be "organized", not
"incorporated" or "chartered", and its founding document is likewise
known as its "articles of organization", instead of its "articles of
incorporation" or its "corporate charter". Internal operations of an
LLC are further governed by its "operating agreement", rather than its
"bylaws". The owner of beneficial rights in an LLC is known as a
"member," rather than a "shareholder". Additionally, ownership in
an LLC is represented by a "membership interest" or an "LLC interest"
(sometimes measured in "membership units" or just "units" and at other
times simply stated only as percentages), rather than represented by
"shares of stock" or just "shares" (with ownership measured by the
number of shares held by each shareholder). Similarly, when issued in
physical rather than electronic form, a document evidencing ownership
rights in an LLC is called a "membership certificate" rather than a
In the absence of express statutory guidance, most American courts
have held that LLC members are subject to the same common law alter
ego piercing theories as corporate shareholders. However, it is
more difficult to pierce the LLC veil because LLCs do not have many
formalities to maintain. As long as the LLC and the members do not
commingle funds, it is difficult to pierce the LLC veil.
Membership interests in LLCs and partnership interests are also
afforded a significant level of protection through the charging order
mechanism. The charging order limits the creditor of a debtor-partner
or a debtor-member to the debtor's share of distributions, without
conferring on the creditor any voting or management rights.
Limited liability company members may, in certain circumstances, also
incur a personal liability in cases where distributions to members
render the LLC insolvent.
Flexibility and default rules
LLCs are subject to fewer regulations than traditional corporations,
and thus may allow members to create a more flexible management
structure than is possible with other corporate forms. As long as it
remains within the confines of state law, the operating agreement is
responsible for the flexibility the members of the LLC have in
deciding how their LLC will be governed. State statutes typically
provide automatic or "default" rules for how an LLC will be governed
unless the operating agreement provides otherwise.
The limited liability company ("LLC") has grown to become one of the
most prevalent business forms in the United States. Even the use of a
single member LLC affords greater protection for the assets of the
member, as compared to operating as an unincorporated entity.
Effective August 1, 2013, the Delaware Limited Liability
provides that the managers and controlling members of a limited
liability company owe fiduciary duties of care and loyalty to the
limited liability company and its members. Under the amendment
(prompted by the Delaware Supreme Court's decision in Gatz Properties,
LLC v. Auriga Capital Corp), parties to an LLC remain free to
expand, restrict, or eliminate fiduciary duties in their LLC
agreements (subject to the implied covenant of good faith and fair
Under 6 Del. C. Section 18-101(7), a Delaware LLC operating agreement
can be written, oral or implied. It sets forth member capital
contributions, ownership percentages, and management structure. Like a
prenuptial agreement, an operating agreement can avoid future disputes
between members by addressing buy-out rights, valuation formulas, and
transfer restrictions. The written LLC operating agreement should be
signed by all of its members.
For U.S. federal income tax purposes, an LLC is treated by default as
a pass-through entity. If there is only one member in the company,
the LLC is treated as a “disregarded entity” for tax purposes, and
an individual owner would report the LLC's income or loss on Schedule
C of his or her individual tax return. Thus, income from the LLC is
taxed at the individual tax rates. The default tax status for LLCs
with multiple members is as a partnership, which is required to report
income and loss on IRS Form 1065. Under partnership tax treatment,
each member of the LLC, as is the case for all partners of a
partnership, annually receives a Form K-1 reporting the member's
distributive share of the LLC's income or loss that is then reported
on the member's individual income tax return. On the other hand,
income from corporations is taxed twice, once at the corporate entity
level and again when distributed to shareholders, thus more tax
savings often result if a business formed as an LLC rather than a
An LLC with either single or multiple members may elect to be taxed as
a corporation through the filing of IRS Form 8832. After electing
corporate tax status, an LLC may further elect to be treated as a
C corporation (taxation of the entity's income prior to any
dividends or distributions to the members and then taxation of the
dividends or distributions once received as income by the members) or
S corporation (entity level income and loss passes through to
the members). Some commentators have recommended an LLC taxed as a
S-corporation as the best possible small business structure. It
combines the simplicity and flexibility of an LLC with the tax
benefits of an S-corporation (self-employment tax savings).
Choice of tax regime. An LLC can elect to be taxed as a sole
S corporation or
C corporation (as long as
they would otherwise qualify for such tax treatment), providing for a
great deal of flexibility.
A limited liability company with multiple members that elects to be
taxed as partnership may specially allocate the members' distributive
share of income, gain, loss, deduction, or credit via the company
operating agreement on a basis other than the ownership percentage of
each member so long as the rules contained in Treasury Regulation (26
CFR) 1.704-1 are met. S corporations may not specially allocate
profits, losses and other tax items under US tax law.
The owners of the LLC, called members, are protected from some or all
liability for acts and debts of the LLC, depending on state shield
In the United States, an
S corporation has a limited number of
stockholders, and all of them must be U.S. citizens; an LLC may have
an unlimited number of members, and there is no citizenship
Much less administrative paperwork and record-keeping than a
Pass-through taxation (i.e., no double taxation), unless the LLC
elects to be taxed as a C corporation.
Using default tax classification, profits are taxed personally at the
member level, not at the LLC level.
LLCs in most states are treated as entities separate from their
members. However, in some jurisdictions such as Connecticut, case law
has determined that owners were not required to plead facts sufficient
to pierce the corporate veil and LLC members can be personally liable
for operation of the LLC (see, for example, the case of Sturm v. Harb
LLCs in some states can be set up with just one natural person
Less risk of being "stolen" by fire-sale acquisitions (more protection
against "hungry" investors).
For real estate companies, each separate property can be owned by its
own individual LLC, thereby shielding not only the owners but their
other properties from cross-liability.
Although there is no statutory requirement for an operating agreement
in most jurisdictions, members of a multiple member LLC who operate
without one may encounter problems. Unlike state laws regarding stock
corporations, which are very well developed and provide for a variety
of governance and protective provisions for the corporation and its
shareholders, most states do not dictate detailed governance and
protective provisions for the members of a limited liability company.
Thus, in the absence of such statutory provisions, the members of an
LLC must establish governance and protective provisions pursuant to an
operating agreement or similar governing document.
It may be more difficult to raise financial capital for an LLC as
investors may be more comfortable investing funds in the
better-understood corporate form with a view toward an eventual IPO.
One possible solution may be to form a new corporation and merge into
it, dissolving the LLC and converting into a corporation.
Many jurisdictions—including Alabama, California, Kentucky, New
York, Pennsylvania, Tennessee, and Texas—levy a franchise tax or
capital values tax on LLCs. In essence, this franchise or business
privilege tax is the fee the LLC pays the state for the benefit of
limited liability. The franchise tax can be an amount based on
revenue, an amount based on profits, or an amount based on the number
of owners or the amount of capital employed in the state, or some
combination of those factors, or simply a flat fee, as in Delaware.
Texas for 2007 the franchise tax is replaced with the
Business Margin Tax. This is paid as: tax payable = revenues
minus some expenses with an apportionment factor. In most states,
however, the fee is nominal and only a handful charge a tax comparable
to the tax imposed on corporations.
In California, both foreign and domestic LLCs, corporations, and
trusts, whether for-profit or non-profit—unless the entity is tax
exempt—must at least pay a minimum income tax of $800 per year to
the Franchise Tax Board; and no foreign LLC, corporation or trust may
conduct business in
California unless it is duly registered with the
California Secretary of State.
Renewal fees may also be higher. Maryland, for example, charges a
stock or nonstock corporation $120 for the initial charter, and $100
for an LLC. The fee for filing the annual report the following year is
$300 for stock-corporations and LLCs. The fee is zero for non-stock
corporations. In addition, certain states, such as New York, impose a
publication requirement upon formation of the LLC which requires that
the members of the LLC publish a notice in newspapers in the
geographic region that the LLC will be located that it is being
formed. For LLCs located in major metropolitan areas (e.g., New York
City), the cost of publication can be significant.
The management structure of an LLC may not be clearly stated. Unlike
corporations, they are not required to have a board of directors or
officers. (This could also be seen as an advantage to some.)
Taxing jurisdictions outside the US are likely to treat a US LLC as a
corporation, regardless of its treatment for US tax purposes—for
example a US LLC doing business outside the US or as a resident of a
foreign jurisdiction. This is very likely where the country (such
as Canada) does not recognize LLCs as an authorized form of business
entity in that country.
The principals of LLCs use many different titles—e.g., member,
manager, managing member, managing director, chief executive officer,
president, and partner. As such, it can be difficult to determine who
actually has the authority to enter into a contract on the LLC's
A Professional Limited Liability
Company (PLLC, P.L.L.C., or P.L.) is
a limited liability company organized for the purpose of providing
professional services. Usually, professions where the state requires a
license to provide services, such as a doctor, chiropractor, lawyer,
accountant, architect, landscape architect, or engineer, require the
formation of a PLLC. However, some states, such as California, do
not permit LLCs to engage in the practice of a licensed profession.
Exact requirements of PLLCs vary from state to state. Typically, a
PLLC's members must all be professionals practicing the same
profession. In addition, the limitation of personal liability of
members does not extend to professional malpractice claims.
Series LLC is a special form of a
Limited liability company that
allows a single LLC to segregate its assets into separate series. For
example, a series LLC that purchases separate pieces of real estate
may put each in a separate series so if the lender forecloses on one
piece of property, the others are not affected.
L3C is a for-profit, social enterprise venture that has a stated
goal of performing a socially beneficial purpose, not maximizing
income. It is a hybrid structure that combines the legal and tax
flexibility of a traditional LLC, the social benefits of a nonprofit
organization, and the branding and market positioning advantages of a
An Anonymous Limited Liability
Company is a LLC for which ownership
information is not made publicly available by the state. This is
typically accomplished by using a third-party to act as the organizer
and registered agent of the LLC.
Besloten vennootschap met beperkte aansprakelijkheid, a Belgian (bvba)
and Dutch (bv) private limited company
Société à responsabilité limitée, the equivalent in French
Limited liability partnership
Limited liability partnership (LLP)
List of company registers
List of business entities
Wholly Foreign-Owned Enterprise
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^ Bainbridge, Stephen (27 September 2014). "Didn't sign your LLC
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ProfessorBainbridge.com. Retrieved 7 September 2017.
^ "Instruction SS-4 (Rev. January 2011)" (PDF). Retrieved
^ "LLC Filing as a
Corporation or Partnership". IRS. Internal Revenue
Service. Retrieved 7 September 2017.
^ Akalp, Nellie (9 February 2012). "How to Structure Your Startup to
Avoid Double Taxation". Mashable. Retrieved 7 September 2017.
^ "IRS Form 8832 (Rev. January 2011)" (PDF). Retrieved 7 September
^ "Tax Advantages of Corporations - Updated for Tax Year 2016".
TurboTax. Retrieved 7 September 2017.
^ "Sturm v. Harb Development, 298 Conn. 124, 2 A.3d 859 (2010)".
Google Scholar. Google. Retrieved 7 September 2017.
^ "Six Benefits of Limited Liability Companies". Cornerstone Law Firm.
Cornerstone Law Firm, LLC. Retrieved 23 October 2017.
^ For example,
HMRC in the United Kingdom, see
HMRC Tax Manuals,
^ Donahue, Larry. "Just How "Anonymous" are Anonymous LLC's?". Law 4
Small Business, P.C. Retrieved 8 March 2017.
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