Definition: A limited liability company (LLC) is a business organization that has some benefits of a corporation and some of a limited partnership. In other words, an LLC is an entity type that gives owners the benefits of owning a corporation while maintaining the advantages of a limited partnership.
What Does LLC Mean?
This is a relatively new form of business compared to corporations. For a while many states did not recognize LLCs as legitimate business entities. Today most states have special rules for limited liability companies that allow owners a few different benefits.
For example, LLC owners, usually called members, are protected with limited liability just like if they were shareholders in a corporation. Third parties cannot attack owners’ personal assets because of this protection. Also, members can participate directly in the management of the company. This means each member can vote on issues and will have a say in how the day-to-day operations are carried out.
Unlike corporations, on the other hand, LLCs do not pay taxes directly. In this way, it is treated more as a partnership than a corporation. The members themselves are responsible for the income taxes of the company because the revenue flows through the company to the individual investors based on their ownership share.
As you can see, the company structure is really the best of both worlds. It has all the major benefits of a corporation without the technical and tedious downsides. At the same time, it avoids the double taxation that C corporations have when trying to distribute profits to their owners. LLCs avoid this by allowing the profits to flow directly to the owners without having to pay a separate dividend tax.