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What is a Limited Liability Company (LLC)

The term 'Limited Liability Company (LLC)' is included in the Accounting edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...

A limited liability company is often referred to by its acronym LLC. These business setups combine the best in both worlds of proprietorships and corporations. They offer the sole proprietorship or partnerships’ advantages of pass through taxation. At the same time, an LLC provides the same limited liability for the owners which a corporation receives.

With a limited liability company, the owners will file their business losses or profits with their individual tax returns. This is because an LLC is not considered to be its own taxable structure. When lawsuits against the company are involved, it is only business assets that are at risk of seizure.

Creditors and lawsuit parties are not usually able to get to the LLC owners’ personal assets, like cars or houses. This is not absolute protection. If the owners of the LLC engage in unethical, illegal, or irresponsible behavior, then they can forfeit this level of security.

Setting up a limited liability company is harder than establishing either a sole proprietorship or partnership. Once this hurdle is cleared, it is much easier to run the LLC than it is a corporation. Officers of corporations are not completely protected from actions they undertake in the business.

LLC owners must be careful not to behave like the entity is a mere extension of their own individual activities. Should the owners not act as if the LLC is its own separate business concern, then courts can determine that the business LLC does not really exist. In these cases, the judge could decide that individuals are masquerading their business affairs and conducing business as a personal venture. They can became liable then for these actions if this determination is made.

Taxes are another major reason that individuals opt to set up a limited liability company. As pass through entities, the income from their business passes on through the entity directly to the members of the LLC. This means that they must report all financial gains or losses from the enterprise directly on their own tax returns. They do not have to file separate business tax returns. The IRS does require that LLC owners make an estimated quarterly tax payment four times per year.

LLCs which are owned by more than one individual do have to file the informational return Form 1065 every year with the IRS. This form clearly states every owner’s share of the limited liability company profits or losses. The IRS goes over these to be certain that the owners are all appropriately reporting their share of the earnings.

Limited liability company management is specific in how it has to be conducted. There are two forms of this. Member management involves an equal participation of the owners in the operating of the business. This is the way that the majority of smaller LLC owners run them.

The alternative form of management is called manager management. In this type of business operation, the collective owners of the LLC must choose someone to handle the daily responsibilities of managing the company. This could be an owner or several of the owners. It could also be someone who is not a part of the LLC ownership who professionally manages the business on their behalf. In this arrangement, the owners who are not managing are only tasked with sharing in the profits or losses of the business. This is often the case with family members or friends who invest in a limited liability company.

The term 'Limited Liability Company (LLC)' is included in the Accounting edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here.