Glossary - Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure in the United States that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. This means that the company itself is not taxed on its profits but instead, profits and losses are passed through to individual members to report on their personal tax returns. The key feature of an LLC is that it protects its members against personal liability for the debts and obligations of the entity, to the extent of their investment in the LLC.
Also known as
- Limited Liability Corporation
- LLC
Use cases examples
- Operating Agreement: The LLC's operating agreement outlines the governing structure and operating guidelines of the company, including the allocation of profits and losses among members.
- Formation Documents: The Articles of Organization filed with the state government to legally form the LLC must designate the registered agent and the principal place of business.
Considerations for investors
- The impact of the LLC structure on investment terms and exit strategies, considering the pass-through nature of income and losses.
- Evaluating the legal protection offered by the LLC structure against the entity’s debts and liabilities, and how this impacts investment risk.
- Understanding how the LLC's financials are reported, given the absence of corporate taxation, to assess the company's performance accurately.
Considerations for founders
- Choosing the right management structure for the LLC: member-managed vs. manager-managed.
- Understanding the tax implications and benefits of an LLC, including potential eligibility for pass-through taxation.
- The necessity of creating a comprehensive operating agreement to delineate member roles, responsibilities, and profit-sharing.
- Compliance with state-specific regulations and requirements for forming and maintaining an LLC.
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