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What Is a Limited Liability Corporation?

Owners of a limited liability corporation may be held personally liable in several different circumstances.
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  • Written By: Jan Hill
  • Edited By: Lauren Fritsky
  • Last Modified Date: 21 December 2014
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A limited liability corporation (LLC) is a business structure that combines some of the benefits of a corporation and a partnership, or sole proprietorship. An LLC resembles a corporation in that the members' personal liability for debts and judgments against the corporation is limited. Like a partnership, a limited liability corporation may feature flexible management and tax advantages. The owners and shareholders of a limited liability corporation are collectively called members. An LLC is typically set up through a local government filing office by completing the required form and paying a fee.

Limited liability refers to the separate status that the members and the corporation have from each other. If the business owes money, has a legal judgment against it, or files bankruptcy, the assets of the business may be seized, but the personal possessions of the owners are not usually at risk. Personal possessions may include vehicles and homes. Because the members' personal assets cannot be used to pay off the debts of the corporation, owners only stand to lose the amount of money they invested in the LLC.

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Limited liability corporation owners and shareholders might lose the protection from liability if they act illegally or unethically. An owner of a limited liability corporation may be held personally liable in several different circumstances. If an LLC owner injures someone, personally guarantees a loan on which the LLC defaults, or intentionally does something to harm the company, he might be held personally liable. Committing tax violations or treating the company as something other than a separate entity might also result in the loss of limited liability.

Similar to a partnership, the limited liability corporation is not a separate entity for tax purposes. The members of a limited liability corporation may report the profits and losses of the LLC on their personal income tax return and avoid being double-taxed, or paying both personal and corporate tax. This tax arrangement is called a "pass through" because the finances of the business pass through to its owners.

An LLC is commonly set up by filling out a document called the "articles of operation" with the appropriate local legal entity. Most areas will allow one or more individuals, companies, or other LLCs to form a limited liability corporation. Some offices have blank articles of operation forms that might take only a few minutes to complete. Various areas might have different requirements for forming an LLC. Non-profit organizations, banks, and insurance companies are sometimes not able to have LLC status.

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