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Business Types: Limited Liability Company

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What is a Limited Liability Company?

A Limited Liability Company, or LLC, is a company that is drawn from a mixture of partnership and corporate forms of business organizations, that is they look like corporations but have different rules for tax and liability purposes. The LLC is an unincorporated business organization that contains dissolution, management and transferability provisions similar to those of a general partnership, but that can be easily altered to resemble the limited partnership or the corporate model. Generally, the LLC offers a domestic entity the tax advantages of a partnership with limited liability for all members, an advantage commonly associated with corporations. The LLC is best understood in terms of four general characteristics: limited liability; partnership tax features; the ability to choose between centralized and direct member management (almost complete internal flexibility); and creditor protection provisions.

Limited liability company statutes provide that members, like corporate shareholders, are not liable as such for the debts of the LLC. These statutes, however, do not protect members from liability for agreed contributions and excessive distributions, for members own wrongs (torts) or for the debts the members contractually assume or guarantee.

An LLC is superficially similar to a corporation in the following ways: it is a separate legal entity that is formed by filing articles of organization with the Secretary of State; it may be formed for any lawful purpose subject to exceptions for certain kinds of businesses such as banking and insurance; an LLC has regulations and an operating agreement (instead of bylaws); the owners are called members (rather than shareholders); and limited liability companies have managers (rather than directors) and the managers are chosen in a similar manner in which shareholders choose directors of a corporation.

An LLC is also similar to a partnership in the following ways: an LLC may elect to assume a management structure that is virtually identical to that of a general partnership with the sole exception of avoidance of unlimited liability; the operating agreements in many limited liability companies more closely approximate a partnership agreement than corporate bylaws; membership interests in an LLC are also similar to partnership characteristics in transfer of interest and dissolution; and member-managed limited liability companies follow the partnership model in that they provide that each member is an agent of the LLC for the purpose of its business and that each member has the right to posses LLC property for business purposes.

An LLC differs from a limited partnership in that all participants must actively take part in control of the business without restriction and fear of personal liability for business obligations. The source of limited liability provided by an LLC is analogous to that provided by limited partnership statutes for limited partners. A limited partnership files a certificate with the Secretary of State and the limited partners thereby obtain the shield of limited liability. Similarly, the LLC files articles of organization with a designated state official and the members of the LLC thereby obtain the shield of limited liability.