Definition
The term limited liability company, or LLC, is used to describe a business structure whereby the owners and managers of that organization are afforded limited liability exposure.
Explanation
Limited Liability Companies have grown in popularity because of their limited personal liability feature. The structure is described as being a hybrid between a corporation and partnerships / sole proprietorships.
Corporation: created as a separate legal entity, liabilities distinct from members, shareholders lose investments if the corporation fails.
Sole Proprietorship: a business that is owned and run by one person, with no legal difference between the owner and business.
The creation of a business structure, such as an LLC, is made possible by state statute, meaning the rules of formation can vary slightly from state to state. For example, most states permit a single owner to form a Limited Liability Company.
Limited Liability Companies are treated as pass-through entities for income tax purposes. If there is only one member in the company, that individual would file a combined tax return. Federal regulations prohibit certain types of businesses such as banks, not-for-profit organizations and insurance companies, from forming a LLC.
Related Terms
A corporation is a business that is organized as a separate legal entity from the owners of the company. Ownership in a corporation is typically determined through the issuing of shares of common stock. One of the distinguishing characteristics of a corporation is limited liability.
Moneyzine EditorJanuary 12th, 2024- A business entity that is owned by only one person is known as a single or sole proprietorship. The owner of a sole proprietorship is entitled to all of the profits of the business as well as its debts.Moneyzine EditorSeptember 21st, 2023
- The term partnership is used to describe an unincorporated business entity that is owned by two or more persons. Partners own assets together, share in the business profits or losses, and are typically jointly liable for debts, legal actions, and the payment of taxes.Moneyzine EditorSeptember 20th, 2023
- The financial accounting term organization costs refer to those expenditures incurred during the formation and launch of a corporation. Organization costs can include legal payments, state and federal registration and incorporation fees, promotions, and charges associated with the underwriting of stocks and bonds.Moneyzine EditorSeptember 20th, 2023
The term business organization refers to the form of entity used by a company to conduct business. Sole proprietorships, partnerships, and corporations are the three forms of a business organization.Moneyzine EditorJanuary 9th, 2024
The term articles of incorporation refer to documents submitted by a business entity to a government agency to legally register the creation of a corporation. The articles of incorporation are typically submitted to the Secretary of State or Department of the Treasury using a form that is unique to each state.Moneyzine EditorSeptember 18th, 2023
