Limited Liability Company (LLC) Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Limited Liability Company (LLC), written in plain English, along with examples of how it is used.
What is Limited Liability Company (LLC)?
“Company that provides its members the benefits of both a corporation and a partnership. Similar to a corporation, an LLC offers limited liability to its members. However, taxation for an LLC is passed to the individual owners of the LLC and corporate income tax is not paid.
History and Definition of Limited Liability Company (LLC)
A Limited Liability Company (LLC) is an entity type that combines the best of both worlds from a corporation and a partnership. It provides personal asset protection to its members, similar to a corporation, while still being taxed as a partnership. LLCs were first introduced in the United States in 1977, specifically in Wyoming. At the time, Wyoming wanted to give business owners more flexibility in structuring their companies. Since then, LLCs have become a popular entity type for small businesses due to their simplicity in formation, flexibility in management, and tax benefits.
LLCs offer a unique business structure that shields its individual members from financial and legal liability. The term "limited liability" refers to the fact that the members' liability is limited to their investment in the company, and their personal assets cannot be seized to pay for any debts or legal issues of the LLC. Another advantage of LLCs is that they are pass-through entities and therefore the business income is taxed as personal income rather than at the corporate tax rate.
Examples of Limited Liability Company (LLC)
Jane and Jack started an LLC to run their small coffee shop business. As the LLC grows in profit, the income is split between Jane and Jack and taxed on their personal income tax forms instead of the company being taxed.
Mike wanted to invest in his friend's business, but didn't want to risk his personal assets. Therefore, they established an LLC with a limited liability agreement to ensure that Mike's investments were protected.
Tim and Tom started a lawn care service, and formed an LLC instead of a partnership to take advantage of the limited liability offered by the LLC structure.
Legal Terms Similar to Limited Liability Company (LLC)
Corporation: a legal entity that is separate from its shareholders, who have limited liability for the debts and actions of the corporation.
Partnership: a business structure where two or more individuals share ownership, profits, and decision-making.
Sole Proprietorship: a business structure where one individual owns and operates the business and is responsible for all aspects of the business including liabilities.