What is a limited liability company (LLC)?

An LLC is a form of business entity that offers its members limited liability along with partnership taxation, also known as flow-through taxation. LLCs combine the best of both corporate and partnership structures: protection of personal assets and tax advantages respectively.

What is limited liability?

Say an LLC contracts with a supplier and is unable or unwilling to pay that supplier. The members of the LLC will not be sued personally, nor will their personal assets be at risk solely because they are a member of the LLC. However, members' investments in the LLC will be at risk, but that is the limit. (At the risk of sounding too much like a lawyer, there are exceptions to almost every generalization, depending on the facts.)

What is partnership or flow-through taxation?

One of the major characteristics of partnership tax treatment is that partnerships (or LLCs) are not taxed at the entity level; corporations, by contrast, are taxed on profit, and then shareholders are taxed on income distributed to them. Other tax planning opportunities may be available, depending on the LLC and members' overall pictures.

What type of businesses are using the LLC form?

Almost all types. Family-owned businesses, which may want to take advantage of some estate planning flexibility available to LLCs are using this form as are professional practice groups, such as accountants, architects, lawyers, and physicians. Joint ventures, where two or more independent entities want to join in a single enterprise, which prior to the advent of LLCs would have been done as a partnership, can also benefit from forming LLCs.

What if we have been operating as a partnership - can we convert?

Yes. And from a liability perspective, you should consider doing so. Any entity can become an LLC, including a sole proprietorship. Business owners, together with their accountants and lawyers, should add limited liability companies to the list of considerations when structuring a business.