Limited liability company

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A limited liability company (LLC) is the US-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.[1] An LLC is not a corporation under state law; it is a legal form of a company that provides limited liability to its owners in many jurisdictions. LLCs are well known for the flexibility that they provide to business owners; depending on the situation, an LLC may elect to use corporate tax rules instead of being treated as a partnership,[2] and, under certain circumstances, LLCs may be organized as not-for-profit.[3] In certain U.S. states (for example, Texas), businesses that provide professional services requiring a state professional license, such as legal or medical services, may not be allowed to form an LLC but may be required to form a similar entity called a professional limited liability company (PLLC).[4]

A limited liability company (LLC) is a hybrid legal entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC is a type of unincorporated association distinct from a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation.[5] As a business entity, an LLC is often more flexible than a corporation and may be well-suited for companies with a single owner.[6]

Although LLCs and corporations both possess some analogous features, the basic terminology commonly associated with each type of legal entity, at least within the United States, is sometimes different. When an LLC is formed, it is said to be "organized", not "incorporated" or "chartered", and its founding document is likewise known as its "articles of organization," instead of its "articles of incorporation" or its "corporate charter". Internal operations of an LLC are further governed by its "operating agreement," rather than its "bylaws." The owner of beneficial rights in an LLC is known as a "member," rather than a "shareholder.”[7] Additionally, ownership in an LLC is represented by a "membership interest" or an "LLC interest" (sometimes measured in "membership units" or just "units" and at other times simply stated only as percentages), rather than represented by "shares of stock" or just "shares" (with ownership measured by the number of shares held by each shareholder). Similarly, when issued in physical rather than electronic form, a document evidencing ownership rights in an LLC is called a "membership certificate" rather than a "stock certificate".[8]

In the absence of express statutory guidance, most American courts have held that LLC members are subject to the same common law alter ego piercing theories as corporate shareholders.[9] However, it is more difficult to pierce the LLC veil because LLCs do not have many formalities to maintain. As long as the LLC and the members do not commingle funds, it is difficult to pierce the LLC veil.[10][11] Membership interests in LLCs and partnership interests are also afforded a significant level of protection through the charging order mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor's share of distributions, without conferring on the creditor any voting or management rights.[12]

Limited liability company members may, in certain circumstances, also incur a personal liability in cases where distributions to members render the LLC insolvent.[13]


The first state to enact a law authorizing limited liability companies was Wyoming in 1977. The form did not become immediately popular, in part because of uncertainties in tax treatment by the Internal Revenue Service. After an IRS ruling in 1988 that Wyoming LLCs could be taxed as partnerships, other states began enacting LLC statutes. By 1996, all 50 states had LLC statutes.[14]

Flexibility and default rules

LLCs are subject to fewer regulations than traditional corporations, and thus may allow members to create a more flexible management structure than is possible with other corporate forms. As long as the LLC remains within the confines of state law, the operating agreement is responsible for the flexibility the members of the LLC have in deciding how their LLC will be governed.[15] State statutes typically provide automatic or "default" rules for how an LLC will be governed unless the operating agreement provides otherwise, as permitted by statute in the state where the LLC was organized.

The limited liability company ("LLC") has grown to become one of the most prevalent business forms in the United States. Even the use of a single member LLC affords greater protection for the assets of the member, as compared to operating as an unincorporated entity.[16]

Effective 1 August 2013, the Delaware Limited Liability Company Act provides that the managers and controlling members of a limited liability company owe fiduciary duties of care and loyalty to the limited liability company and its members. Under the amendment (prompted by the Delaware Supreme Court's decision in Gatz Properties, LLC v. Auriga Capital Corp),[17] parties to an LLC remain free to expand, restrict, or eliminate fiduciary duties in their LLC agreements (subject to the implied covenant of good faith and fair dealing).[18]

Under 6 Del. C. Section 18-101(7), a Delaware LLC operating agreement can be written, oral or implied. It sets forth member capital contributions, ownership percentages, and management structure. Like a prenuptial agreement, an operating agreement can avoid future disputes between members by addressing buy-out rights, valuation formulas, and transfer restrictions. The written LLC operating agreement should be signed by all of its members.[19]

Like a corporation, LLCs are required to register in the states they are "conducting (or transacting) business". Each state has different standards and rules defining what "transacting business" means, and as a consequence, navigating what is required can be quite confusing for small business owners. Simply forming a LLC in any state may not be enough to meet legal requirements, and specifically, if a LLC is formed in one state, but the owner (or owners) are located in another state (or states), or an employee is located in another state, or the LLC's base of operations is located in another state, the LLC may need to register as a foreign LLC in the other states it is "transacting business."[20]

Income tax

For U.S. federal income tax purposes, an LLC is treated by default as a pass-through entity.[21] If there is only one member in the company, the LLC is treated as a "disregarded entity" for tax purposes (unless another tax status is elected), and an individual owner would report the LLC's income or loss on Schedule C of his or her individual tax return. Thus, income from the LLC is taxed at the individual tax rates. The default tax status for LLCs with multiple members is as a partnership, which is required to report income and loss on IRS Form 1065. Under partnership tax treatment, each member of the LLC, as is the case for all partners of a partnership, annually receives a Form K-1 reporting the member's distributive share of the LLC's income or loss that is then reported on the member's individual income tax return.[22] On the other hand, income from corporations is taxed twice: once at the corporate entity level and again when distributed to shareholders. Thus, more tax savings often result if a business formed as an LLC rather than a corporation.[23]

An LLC with either single or multiple members may elect to be taxed as a corporation through the filing of IRS Form 8832.[24] After electing corporate tax status, an LLC may further elect to be treated as a regular C corporation (taxation of the entity's income prior to any dividends or distributions to the members and then taxation of the dividends or distributions once received as income by the members) or as an S corporation (entity level income and loss passes through to the members). Some commentators have recommended an LLC taxed as a S-corporation as the best possible small business structure. It combines the simplicity and flexibility of an LLC with the tax benefits of an S-corporation (self-employment tax savings).[25]



Although there is no statutory requirement for an operating agreement in most jurisdictions, members of a multiple member LLC who operate without one may encounter problems. Unlike state laws regarding stock corporations, which are very well developed and provide for a variety of governance and protective provisions for the corporation and its shareholders, most states do not dictate detailed governance and protective provisions for the members of a limited liability company. In the absence of such statutory provisions, members of an LLC must establish governance and protective provisions pursuant to an operating agreement or similar governing document.


See also


  1. ^ Schwindt, Kari (1996). "Limited Liability Companies: Issues in Member Liability". UCLA Law Review. 44: 1541.
  2. ^ "Limited Liability Company (LLC)". Internal Revenue Service. Retrieved 9 October 2019.
  3. ^ McCray, Richard A.; Thomas, Ward L. "Limited Liability Companies as Exempt Organizations" (PDF). Internal Revenue Service. Retrieved 9 October 2019.
  4. ^ a b Akalp, Neil (10 August 2016). "Should You Structure Your Accounting Firm as an LLC, PLLC or PC?". Accounting Today. SourceMedia. Retrieved 9 October 2019.
  5. ^ Larson, Aaron (8 May 2018). "What is a Limited Liability Company (LLC)". ExpertLaw.
  6. ^ Bischoff, Bill (1 May 2017). "The advantages of owning real estate in a single-member LLC". MarketWatch, Inc.
  7. ^ Johnston, Kevin. "What Is the Difference Between a Shareholder Vs. a LLC Member?". Hearst Newspapers, LLC. Houston Chronicle. Retrieved 9 October 2019.
  8. ^ Friedman, Scott E. (1996). Forming Your Own Limilted Liability Company. Dearborn Trade Publishing. p. 60. ISBN 9780936894935.
  9. ^ Macey, Jonathan R. (27 March 2014). "The Three Justifications for Piercing the Corporate Veil". The Three Justifications for Piercing the Corporate Veil.
  10. ^ Klein, Shaun M. (1996). "Piercing the Veil of the Limited Liability Company, from Sure Bet to Long Shot: Gallinger v. North Star Hospital Mutual Assurance, Ltd". Journal of Corporate Law. 22: 131.
  11. ^ Vandervoort, Jeffrey K. (2004). "Piercing the Veil of Limited Liability Companies: The Need for a Better Standard". DePaul Business and Commercial Law Journal. 3: 51.
  12. ^ Adkisson, Jay (30 April 2013). "The Misunderstood Charging Order". Forbes.
  13. ^ See, e.g., "Delaware Code, Title 6, Chapter 18, Limited Liability Company Act". State of Delaware. Retrieved 9 October 2019.
  14. ^ "LLCs: Is the Future Here? A History and Prognosis". October 2004. Archived from the original on 2 May 2018.
  15. ^ "Pros and Cons of a Limited Liability Company (LLC)". Retrieved 9 October 2019.
  16. ^ Miller, Shari P. "Single Member LLC Vs. Sole Proprietorship Liability". Houston Chronicle. Hearst Newspapers, LLC. Retrieved 9 October 2019.
  17. ^ "Gatz Properties, LLC v. Auriga Capital Corp., 59 A. 3d 1206 (2012)". Google Scholar. Retrieved 9 October 2019.
  18. ^ Falby, Bruce E. (22 August 2013). "Delaware amends its LLC Act: managers and controllers owe fiduciary duties unless LLC agreement provides otherwise". DLA Piper.
  19. ^ Bainbridge, Stephen (27 September 2014). "Didn't sign your LLC operating agreement? Think that'll get you off? Think again".
  20. ^ "Register Your Business". SBA. U.S. Small Business Administration. Retrieved 9 October 2019.
  21. ^ "Instruction SS-4 (Rev. January 2011)" (PDF). Retrieved 9 October 2019.
  22. ^ "LLC Filing as a Corporation or Partnership". IRS. Internal Revenue Service. Retrieved 9 October 2019.
  23. ^ Everett, John; Henning, Cherie; Raabe, William (August 2010). "Converting a C Corporation into an LLC: Quantifying the Tax Costs and Benefits". Journal of Taxation. 113 (2).
  24. ^ "IRS Form 8832 (Rev. January 2011)" (PDF). Retrieved 9 October 2019.
  25. ^ "Tax Advantages of Corporations - Updated for Tax Year 2016". TurboTax. Retrieved 9 October 2019.
  26. ^ "Sturm v. Harb Development, 298 Conn. 124, 2 A.3d 859 (2010)". Google Scholar. Retrieved 9 October 2019.
  27. ^ Parsons, James (1 February 2019). "Here Are the Benefits of Multiple LLCs or Corporations for Your Businesses". Entrepreneur.
  28. ^ Brown, Robert L.; Gutterman, Alan S. (2005). Emerging Companies Guide: A Resource for Professionals and Entrepreneurs. American Bar Association. p. 68. ISBN 1590314662.
  29. ^ Auerbach, Alan J.; Hines, Jr., James R.; Slemrod, Joel (2007). Taxing Corporate Income in the 21st Century. Cambridge University Press. p. 240. ISBN 978-1139464512.
  30. ^ For example, HMRC in the United Kingdom, "HMRC Tax Manuals, DT19853A". Gov.UK. Government of the United Kingdom. 25 May 2017.
  31. ^ Badger, Emily (30 April 2018). "Anonymous Owner, L.L.C.: Why It Has Become So Easy to Hide in the Housing Market". The New York Times.
  32. ^ a b Watson, Libby (6 April 2016). "Why are there so many anonymous companies in Delaware?". Sunlight Foundation.