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What is a Limited Liability Company (LLC)?

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  • Written By: Josie Myers
  • Edited By: Bronwyn Harris
  • Last Modified Date: 07 November 2016
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A Limited Liability Company (LLC) is a relatively new type of business that was started in 1977 in Wyoming. This business structure uses some of the best advantages of several other types of businesses and combines them into one. Like a C Corporation, the owners have limited personal liability, but have the tax advantages of an S Corporation and the flexibility of a partnership.

Like a standard corporation, only the company's assets are at risk, while individual shareholders are protected. This ensures that an owner will never loose more than the amount of money they have invested in the stock. In the case of legal disputes, creditors can not take personal possessions or savings from individual stockholders. Unlike a corporation, an LLC does not have to have corporate meetings and keep minutes. They generally have less scrutiny than corporations who are traded publicly.

Like an S Corporation, an LLC is not subject to double taxation. The money paid to members is not taxed before distribution as it is with a C Corporation. Despite this similarity, there are two large advantages that a LLC has over an S Corporation. S Corporations require a 100 maximum number of shareholders and these must be individuals. Members in an LLC can be corporations and are unlimited, except that there must be at least two. When any owner leaves, the remaining members must agree to continue the business or it is dissolved.

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An LLC allows for flexibility of management and distribution of money that is not found in other business forms. A partnership must divide all profits 50-50. With an LLC, the profits can be handed out based on agreed proportions that represent each individual's stake in the company.

The main disadvantages to an LLC are that it can not live on indefinitely and it can not offer public shares. When one member dies or files for bankruptcy, the company will die unless agreements have been made prior to the event. The way that profits are split arbitrarily does not allow for sale to the general public. If a company plans on offering public shares in the future, an LLC is not the best choice of structure.

In order to form a LLC, there are two basic steps. Articles of Organization must be filed with the Secretary of State along with required fees. An Operating Agreement isn't always required, but is a good idea. This agreement gives an idea of how profit sharing, responsibility and ownership changes will work and offers some level of protection for the members. It is not required to have lawyers draw up these documents, although it is highly advised.

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