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'{{short description|US-specific form of a private limited company}} {{Redirect|LLC}} {{about|the United States of America-specific business entity form|limited liability companies|Limited company|a general discussion of entities with limited liability|Private limited company}} {{Use dmy dates|date=May 2012}} {{Corporate law|USA}} {{Business administration}} A '''limited liability company''' ('''LLC''') is the [[United States of America|US]]-specific form of a [[private limited company]]. It is a [[business]] structure that can combine the [[Flow-through entity|pass-through taxation]] of a [[partnership]] or [[sole proprietorship]] with the [[limited liability]] of a [[corporation]].<ref>{{cite journal|last1=Schwindt|first1=Kari|title=Limited Liability Companies: Issues in Member Liability|journal=UCLA Law Review|date=1996|volume=44|page=1541|url=http://heinonline.org/HOL/LandingPage?handle=hein.journals/uclalr44&div=43|accessdate=9 October 2019}}</ref> An LLC is not a corporation under state law; it is a legal form of a [[company]] that provides limited liability to its owners in many jurisdictions. LLCs are well known for the flexibility that they provide to business owners; depending on the situation, an LLC may elect to use corporate tax rules instead of being treated as a partnership,<ref>{{cite web|url=https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc | title=Limited Liability Company (LLC) | publisher=Internal Revenue Service| access-date=9 October 2019}}</ref> and, under certain circumstances, LLCs may be organized as not-for-profit.<ref>{{cite web |first1=Richard A. |last1=McCray |first2=Ward L. |last2=Thomas |title=Limited Liability Companies as Exempt Organizations |url=https://www.irs.gov/pub/irs-tege/eotopich00.pdf | publisher=Internal Revenue Service | access-date=9 October 2019}}</ref> In certain U.S. states (for example, Texas), businesses that provide professional services requiring a state professional license, such as legal or [[medical services]], may not be allowed to form an LLC but may be required to form a similar entity called a '''professional limited liability company''' ('''PLLC''').<ref name="accountingtoday">{{cite web|last1=Akalp|first1=Neil|title=Should You Structure Your Accounting Firm as an LLC, PLLC or PC?|url=https://www.accountingtoday.com/news/should-you-structure-your-accounting-firm-as-an-llc-pllc-or-pc|website=Accounting Today | publisher=SourceMedia | date=10 August 2016 | access-date=9 October 2019}}</ref> A limited liability company (LLC) is a hybrid [[legal person|legal entity]] having certain characteristics of both a [[corporation]] and a [[partnership]] or [[sole proprietorship]] (depending on how many owners there are). An LLC is a type of [[voluntary association|unincorporated association]] distinct from a corporation. The primary characteristic an LLC shares with a corporation is [[limited liability]], and the primary characteristic it shares with a partnership is the availability of [[flow-through entity|pass-through]] [[taxation in the United States|income taxation]].<ref>{{cite web |last1=Larson |first1=Aaron |title=What is a Limited Liability Company (LLC) |url=https://www.expertlaw.com/library/business/limited_liability_company.html |website=ExpertLaw |accessdate=20 October 2017 |date=8 May 2018}}</ref> As a business entity, an LLC is often more flexible than a corporation and may be well-suited for companies with a single owner.<ref>{{cite web|last1=Bischoff|first1=Bill|title=The advantages of owning real estate in a single-member LLC|url=http://www.marketwatch.com/story/the-advantages-of-owning-real-estate-in-a-single-member-llc-2017-05-01|website=MarketWatch, Inc.|accessdate=9 October 2019|date=1 May 2017}}</ref> Although LLCs and corporations both possess some analogous features, the basic terminology commonly associated with each type of legal entity, at least within the United States, is sometimes different. When an LLC is formed, it is said to be "organized,” not "incorporated" or "chartered,” and its founding document is likewise known as its "[[articles of organization]]," instead of its "[[articles of incorporation]]" or its "corporate charter.” Internal operations of an LLC are further governed by its "[[operating agreement]]," rather than its "[[by-law|bylaws]]." The owner of beneficial rights in an LLC is known as a "member," rather than a "[[shareholder]].” <ref>{{cite news|last1=Johnston|first1=Kevin|title=What Is the Difference Between a Shareholder Vs. a LLC Member?|url=http://smallbusiness.chron.com/difference-between-shareholder-vs-llc-member-61708.html|accessdate=9 October 2019|agency=Houston Chronicle|publisher=[[Hearst Newspapers, LLC]]}}</ref> Additionally, [[ownership]] in an LLC is represented by a "membership interest" or an "LLC interest" (sometimes measured in "membership units" or just "units" and at other times simply stated only as [[percentage]]s), rather than represented by "[[share (finance)|shares of stock]]" or just "shares" (with ownership measured by the number of shares held by each shareholder). Similarly, when issued in physical rather than electronic form, a document evidencing ownership rights in an LLC is called a "membership certificate" rather than a "[[stock certificate]]".<ref>{{cite book|last1=Friedman|first1=Scott E.|title=Forming Your Own Limilted Liability Company|date=1996|publisher=Dearborn Trade Publishing|isbn=9780936894935|page=60|url=https://books.google.com/books?id=EAP5gXGGFFEC|accessdate=9 October 2019}}</ref> In the absence of express statutory guidance, most American courts have held that LLC members are subject to the same common law alter ego [[Piercing the corporate veil|piercing theories]] as corporate shareholders.<ref>{{cite web|last1=Macey|first1=Jonathan R.|title=The Three Justifications for Piercing the Corporate Veil|url=https://corpgov.law.harvard.edu/2014/03/27/the-three-justifications-for-piercing-the-corporate-veil/|website=The Three Justifications for Piercing the Corporate Veil|accessdate=9 October 2019|date=27 March 2014}}</ref> However, it is more difficult to pierce the LLC veil because LLCs do not have many formalities to maintain. As long as the LLC and the members do not [[commingling|commingle]] funds, it is difficult to pierce the LLC veil.<ref>{{cite journal|last1=Klein|first1=Shaun M.|title=Piercing the Veil of the Limited Liability Company, from Sure Bet to Long Shot: Gallinger v. North Star Hospital Mutual Assurance, Ltd.|journal=Journal of Corporate Law|date=1996|volume=22|page=131|url=http://heinonline.org/HOL/LandingPage?handle=hein.journals/jcorl22&div=14|accessdate=7 September 2017}}</ref><ref>{{cite journal|last1=Vandervoort|first1=Jeffrey K.|title=Piercing the Veil of Limited Liability Companies: The Need for a Better Standard|journal=DePaul Business and Commercial Law Journal|date=2004|volume=3|page=51|url=http://heinonline.org/HOL/LandingPage?handle=hein.journals/depbcl3&div=10|accessdate=9 October 2019}}</ref> Membership interests in LLCs and partnership interests are also afforded a significant level of protection through the [[charging order]] mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor's share of distributions, without conferring on the creditor any voting or management rights.<ref>{{cite web|last1=Adkisson|first1=Jay|title=The Misunderstood Charging Order|url=https://www.forbes.com/sites/jayadkisson/2013/04/30/the-misunderstood-charging-order/|website=Forbes|accessdate=9 October 2019|date=30 April 2013}}</ref> Limited liability company members may, in certain circumstances, also incur a personal liability in cases where distributions to members render the LLC insolvent.<ref>See, e.g., {{cite web|title=Delaware Code, Title 6, Chapter 18, Limited Liability Company Act|url=http://delcode.delaware.gov/title6/c018/sc06/index.shtml|website=State of Delaware|accessdate=9 October 2019}}</ref> == History == The first state to enact a law authorizing limited liability companies was [[Wyoming]] in 1977. The form did not become immediately popular, in part because of uncertainties in tax treatment by the [[Internal Revenue Service]]. After an IRS ruling in 1988 that Wyoming LLCs could be taxed as partnerships, other states began enacting LLC statutes. By 1996, all 50 states had LLC statutes.<ref>{{Cite web|url=https://www.americanbar.org/newsletter/publications/law_trends_news_practice_area_e_newsletter_home/llc.html|title=LLCs: Is the Future Here? A History and Prognosis|last=|first=|date=October 2004|website=www.americanbar.org|archive-url= https://web.archive.org/web/20180502071300/https://www.americanbar.org/newsletter/publications/law_trends_news_practice_area_e_newsletter_home/llc.html |archive-date=2 May 2018|access-date=9 October 2019}}</ref> ==Flexibility and default rules== LLCs are subject to fewer regulations than traditional corporations, and thus may allow members to create a more flexible management structure than is possible with other corporate forms. As long as the LLC remains within the confines of state law, the operating agreement is responsible for the flexibility the members of the LLC have in deciding how their LLC will be governed.<ref>{{cite web|title=Pros and Cons of a Limited Liability Company (LLC)|url=https://www.allbusiness.com/pros-and-cons-of-a-limited-liability-company-llc-2517-1.html|website=AllBusiness.com|accessdate=9 October 2019}}</ref> State statutes typically provide automatic or "default" rules for how an LLC will be governed unless the operating agreement provides otherwise, as permitted by statute in the state where the LLC was organized. The limited liability company ("LLC") has grown to become one of the most prevalent business forms in the United States. Even the use of a single member LLC affords greater protection for the assets of the member, as compared to operating as an unincorporated entity.<ref>{{cite web|last1=Miller|first1=Shari P.|title=Single Member LLC Vs. Sole Proprietorship Liability|url=http://smallbusiness.chron.com/single-member-llc-vs-sole-proprietorship-liability-81147.html|website=Houston Chronicle|publisher=[[Hearst Newspapers, LLC]]|accessdate=9 October 2019}}</ref> Effective August 1, 2013, the Delaware Limited Liability Company Act provides that the managers and controlling members of a limited liability company owe fiduciary duties of care and loyalty to the limited liability company and its members. Under the amendment (prompted by the Delaware Supreme Court's decision in ''Gatz Properties, LLC v. Auriga Capital Corp''),''<ref>{{cite web|title=Gatz Properties, LLC v. Auriga Capital Corp., 59 A. 3d 1206 (2012)|url=https://scholar.google.com/scholar_case?case=13162396720159555258|website=Google Scholar|accessdate=9 October 2019}}</ref>'' parties to an LLC remain free to expand, restrict, or eliminate fiduciary duties in their LLC agreements (subject to the implied covenant of good faith and fair dealing).<ref>{{cite web|last1=Falby|first1=Bruce E.|title=Delaware amends its LLC Act: managers and controllers owe fiduciary duties unless LLC agreement provides otherwise|url=https://www.dlapiper.com/en/us/insights/publications/2013/08/delaware-amends-its-llc-act--managers-and-contro__/|website=DLA Piper|accessdate=9 October 2019|date=22 August 2013}}</ref> Under 6 Del. C. Section 18-101(7), a Delaware LLC operating agreement can be written, oral or implied. It sets forth member capital contributions, ownership percentages, and management structure. Like a prenuptial agreement, an operating agreement can avoid future disputes between members by addressing buy-out rights, valuation formulas, and transfer restrictions. The written LLC operating agreement should be signed by all of its members.<ref>{{cite web|last1=Bainbridge|first1=Stephen|title=Didn't sign your LLC operating agreement? Think that'll get you off? Think again.|url=http://www.professorbainbridge.com/professorbainbridgecom/2014/09/didnt-sign-your-llc-operating-agreement-think-thatll-get-you-off-think-again.html|website=ProfessorBainbridge.com|accessdate=9 October 2019|date=27 September 2014}}</ref> Like a [[corporation]], LLCs are required to register in the states they are "conducting (or transacting) business". Each state has different standards and rules defining what "transacting business" means, and as a consequence, navigating what is required can be quite confusing for small business owners. Simply forming a LLC in any state may not be enough to meet legal requirements, and specifically, if a LLC is formed in one state, but the owner (or owners) are located in another state (or states), or an employee is located in another state, or the LLC's base of operations is located in another state, the LLC may need to register as a [[Foreign corporation|foreign LLC]] in the other states it is "transacting business."<ref>{{cite web |title=Register Your Business |url=https://www.sba.gov/business-guide/launch-your-business/register-your-business |website=SBA |publisher=U.S. Small Business Administration |accessdate=9 October 2019}}</ref> ==Income tax== For U.S. federal income tax purposes, an LLC is treated by default as a pass-through entity.<ref>{{cite web|url=https://www.irs.gov/pub/irs-pdf/iss4.pdf |title=Instruction SS-4 (Rev. January 2011) |date= |accessdate=9 October 2019}}</ref> If there is only one member in the company, the LLC is treated as a "disregarded entity" for tax purposes (unless another tax status is elected), and an individual owner would report the LLC's income or loss on [[Form 1040#1040|Schedule C]] of his or her individual tax return. Thus, income from the LLC is taxed at the individual tax rates. The default tax status for LLCs with multiple members is as a partnership, which is required to report income and loss on [[Internal Revenue Service|IRS]] Form 1065. Under partnership tax treatment, each member of the LLC, as is the case for all partners of a partnership, annually receives a Form K-1 reporting the member's distributive share of the LLC's income or loss that is then reported on the member's individual income tax return.<ref>{{cite web|title=LLC Filing as a Corporation or Partnership|url=https://www.irs.gov/businesses/small-businesses-self-employed/llc-filing-as-a-corporation-or-partnership|website=IRS|publisher=Internal Revenue Service|accessdate=9 October 2019}}</ref> On the other hand, income from corporations is taxed twice: once at the corporate entity level and again when distributed to shareholders. Thus, more tax savings often result if a business formed as an LLC rather than a corporation.<ref>{{cite journal |last1=Everett |first1=John |last2=Henning |first2=Cherie |last3=Raabe |first3=William |title=Converting a C Corporation into an LLC: Quantifying the Tax Costs and Benefits |journal=Journal of Taxation |date=August 2010 |volume=113 |issue=2 |url=https://papers.ssrn.com/abstract_id=2363502 |accessdate=9 October 2019}}</ref> An LLC with either single or multiple members may elect to be taxed as a corporation through the filing of IRS Form 8832.<ref>{{cite web|url=https://www.irs.gov/pub/irs-pdf/f8832.pdf |title=IRS Form 8832 (Rev. January 2011) |date= |accessdate=9 October 2019}}</ref> After electing corporate tax status, an LLC may further elect to be treated as a regular [[C corporation]] (taxation of the entity's income prior to any dividends or distributions to the members and then taxation of the [[dividend]]s or distributions once received as income by the members) or as an [[S corporation]] (entity level income and loss passes through to the members). Some commentators have recommended an LLC taxed as a S-corporation as the best possible [[small business]] structure. It combines the simplicity and flexibility of an LLC with the tax benefits of an S-corporation (self-employment tax savings).<ref>{{cite web|url=https://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/Limited-Liability-Company-Taxes/INF12029.html |title=Tax Advantages of Corporations - Updated for Tax Year 2016 |publisher=TurboTax |accessdate=9 October 2019}}</ref> ==Advantages== * Choice of [[entity classification election|tax regime]]. An LLC can elect to be taxed as a [[sole proprietor]], partnership, S corporation or C corporation (as long as they would otherwise qualify for such tax treatment), providing for a great deal of flexibility. * A limited liability company with multiple members that elects to be taxed as partnership may specially allocate the members' distributive share of income, gain, loss, deduction, or credit via the company operating agreement on a basis other than the ownership percentage of each member so long as the rules contained in Treasury Regulation (26 CFR) 1.704-1 are met. S corporations may not specially allocate profits, losses and other tax items under US tax law. * The owners of the LLC, called members, are protected from some or all liability for acts and debts of the LLC, depending on state shield laws. * In the United States, an S corporation has a limited number of stockholders, and all of them must be U.S. tax residents; an LLC may have an unlimited number of members, and there is no citizenship restriction. * Much less administrative paperwork and record-keeping than a corporation. * [[Flow-through entity|Pass-through taxation]] (i.e., no [[double taxation]]), unless the LLC elects to be taxed as a C corporation. * Using default tax classification, [[Profit (accounting)|profits]] are taxed personally at the member level, not at the LLC level. * LLCs in most states are treated as entities separate from their members. However, in some jurisdictions such as Connecticut, case law has determined that owners were not required to plead facts sufficient to pierce the corporate veil and LLC members can be personally liable for operation of the LLC) (see, for example, the case of ''Sturm v. Harb Development''<ref>{{cite web|title=Sturm v. Harb Development, 298 Conn. 124, 2 A.3d 859 (2010)|url=https://scholar.google.com/scholar_case?case=4103942001146152039|website=Google Scholar|accessdate=9 October 2019}}</ref> * LLCs in some states can be set up with just one [[natural person]] involved. * Less risk of being "stolen" by fire-sale acquisitions (more protection against "hungry" [[investor]]s). * For some business ventures, such as real estate investment, each property can be owned by a separate LLC, thereby shielding the owners and their other properties from cross-liability.<ref>{{cite web |last1=Parsons |first1=James |title=Here Are the Benefits of Multiple LLCs or Corporations for Your Businesses |url=https://www.entrepreneur.com/article/314005 |website=Entrepreneur |accessdate=9 October 2019 |date=1 February 2019}}</ref> *Flexible membership: Members of an LLC may include individuals, partnerships, trusts, estates, organizations, or other business entities,<ref>{{cite book |last1=Brown |first1=Robert L. |last2=Gutterman |first2=Alan S. |title=Emerging Companies Guide: A Resource for Professionals and Entrepreneurs |date=2005 |publisher=American Bar Association |isbn=1590314662 |page=68 |url=https://books.google.com/books?id=XqDniFJ5CWQC |accessdate=12 June 2019}}</ref> and most states do not limit the type or number of members.<ref>{{cite book |last1=Auerbach |first1=Alan J. |last2=Hines, Jr. |first2=James R. |last3=Slemrod |first3=Joel |title=Taxing Corporate Income in the 21st Century |date=2007 |publisher=Cambridge University Press |isbn=978-1139464512 |page=240 |url=https://books.google.com/books?id=VfKIGbpozRQC |accessdate=12 June 2019}}</ref> ==Disadvantages== Although there is no statutory requirement for an [[operating agreement]] in most jurisdictions, members of a multiple member LLC who operate without one may encounter problems. Unlike state laws regarding stock corporations, which are very well developed and provide for a variety of governance and protective provisions for the corporation and its shareholders, most states do not dictate detailed governance and protective provisions for the members of a limited liability company. In the absence of such statutory provisions, members of an LLC must establish governance and protective provisions pursuant to an operating agreement or similar governing document. * It may be more difficult to raise [[financial capital]] for an LLC as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual [[initial public offering|IPO]]. One possible solution may be to form a new corporation and merge into it, dissolving the LLC and converting into a corporation. * Many jurisdictions—including [[Alabama]], [[California]], [[Kentucky]], [[New York (state)|New York]], [[Pennsylvania]], [[Tennessee]], and [[Texas]]—levy a [[franchise tax]] or capital values tax on LLCs. In essence, this franchise or business privilege tax is the fee the LLC pays the state for the benefit of limited liability. The franchise tax can be an amount based on revenue, an amount based on profits, or an amount based on the number of owners or the amount of capital employed in the state, or some combination of those factors, or simply a flat fee, as in Delaware. ** Effective in Texas for 2007 the franchise tax is replaced with the Texas Business Margin Tax. This is paid as: tax payable = revenues minus some expenses with an apportionment factor. In most states, however, the fee is nominal and only a handful charge a tax comparable to the tax imposed on corporations. ** In California, both foreign and domestic LLCs, corporations, and trusts, whether for-profit or non-profit—unless the entity is tax exempt—must at least pay a minimum income tax of $800 per year to the Franchise Tax Board; and no foreign LLC, corporation or trust may conduct business in California unless it is duly registered with the California Secretary of State. * Renewal fees may also be higher. Maryland, for example, charges a stock or nonstock corporation $120 for the initial charter, and $100 for an LLC. The fee for filing the annual report the following year is $300 for stock-corporations and LLCs. The fee is zero for non-stock corporations. In addition, certain states, such as New York, impose a publication requirement upon formation of the LLC which requires that the members of the LLC publish a notice in newspapers in the geographic region that the LLC will be located that it is being formed. For LLCs located in major metropolitan areas (e.g., New York City), the cost of publication can be significant. * The management structure of an LLC may not be clearly stated. Unlike corporations, they are not required to have a board of directors or officers. (This could also be seen as an advantage to some.) * Taxing jurisdictions outside the US are likely to treat a US LLC as a corporation, regardless of its treatment for US tax purposes—for example a US LLC doing business outside the US or as a resident of a foreign jurisdiction.<ref>For example, [[HMRC]] in the [[United Kingdom]], {{cite web |title=HMRC Tax Manuals, DT19853A |url=http://www.hmrc.gov.uk/manuals/dtmanual/DT19853A.htm |website=Gov.UK |publisher=Government of the United Kingdom |accessdate=9 October 2019 |date=25 May 2017}}</ref> This is very likely where the country (such as Canada) does not recognize LLCs as an authorized form of business entity in that country. * The principals of LLCs use many different titles—e.g., member, manager, managing member, managing director, chief executive officer, president, and partner. As such, it can be difficult to determine who actually has the authority to enter into a contract on the LLC's behalf. ==Variations== * A Professional Limited Liability Company (PLLC, P.L.L.C., or P.L.) is a limited liability company organized for the purpose of providing professional services. Usually, professions where the state requires a license to provide services, such as a [[Physician|doctor]], [[chiropractor]], [[lawyer]], [[accountant]], [[architect]], [[landscape architect]], or [[engineer]], require the formation of a PLLC.<ref name="accountingtoday"/> However, some states, such as California, do not permit LLCs to engage in the practice of a licensed profession. Exact requirements of PLLCs vary from state to state. Typically, a PLLC's members must all be professionals practicing the same profession. In addition, the limitation of personal liability of members does not extend to professional malpractice claims. * A [[Series LLC]] is a special form of a Limited liability company that allows a single LLC to segregate its assets into separate series. For example, a series LLC that purchases separate pieces of real estate may put each in a separate series so if the lender forecloses on one piece of property, the others are not affected. * An [[L3C]] is a for-profit, social enterprise venture that has a stated goal of performing a socially beneficial purpose, not maximizing income. It is a hybrid structure that combines the legal and tax flexibility of a traditional LLC, the social benefits of a nonprofit organization, and the branding and market positioning advantages of a social enterprise. * An anonymous Limited Liability Company is a LLC for which ownership information is not made publicly available by the state.<ref>{{cite news |last1=Badger |first1=Emily |title=Anonymous Owner, L.L.C.: Why It Has Become So Easy to Hide in the Housing Market |url=https://www.nytimes.com/2018/04/30/upshot/anonymous-owner-llc-why-it-has-become-so-easy-to-hide-in-the-housing-market.html |accessdate=9 October 2019 |work=New York Times |date=30 April 2018}}</ref><ref name=watson>{{cite web |last1=Watson |first1=Libby |title=Why are there so many anonymous companies in Delaware? |url=https://sunlightfoundation.com/2016/04/06/why-are-there-so-many-anonymous-corporations-in-delaware/ |website=Sunlight Foundation |accessdate=9 October 2019 |date=6 April 2016}}</ref> Anonymity is possible in states that do not require the public disclosure of legal ownership of a LLC, or where a LLC's identified legal owners are another anonymous company.<ref name=watson/> ==See also== * ''[[Besloten vennootschap]]'', a Belgian and Dutch private limited company * ''[[Société à responsabilité limitée]]'', the equivalent in French-speaking countries * [[Gesellschaft mit beschränkter Haftung]] (German equivalent)) * [[Incorporation (business)]] * [[Limited liability partnership]] (LLP) * [[List of company registers]] * [[List of business entities]] * [[Unlimited company]] * [[Wholly Foreign-Owned Enterprise]] * [[Foreign corporation|Foreign LLC]] == References == {{Reflist}} {{-}} {{Private equity and venture capital |state = collapsed }} {{Authority control}} {{DEFAULTSORT:Limited Liability Company}} [[Category:Corporate taxation in the United States]] [[Category:Legal entities]] [[Category:Types of business entity]]'