A limited liability company is a type of business entity that has the limited liability feature of corporations, as well as the pass-through taxation feature of partnerships. Members of an LLC are similar to shareholders in a corporation, in that their potential liability is limited to their investment in the LLC. LLCs can be set up so that members manage the company in proportion to their interest in the company, or by electing managers to oversee the company.
Limited Liability Companies have many advantages. Most notably, members of LLCs enjoy limited liability and may participate in management without losing their liability shield. Additionally, as with C Corporations, LLCs have pass-through taxation, and interest in the company may be issued to members for a promise to make future capital contributions or for service. And like S Corporations, LLCs have liberal membership requirements, flexibility in allocating profits and losses, and may have more than one class of stock.
As with any business entity, Limited Liability Companies also have their own set of disadvantages. For instance, legal uncertainty sometimes arises when LLCs perform interstate business with states that do not have LLC legislation. Additionally, lenders and other institutions are somewhat less comfortable dealing with LLCs than with corporations. And finally, LLCs can be more complicated and expensive to establish and operate.
