What is a Limited Liability Company?

A Limited Liability Company is a relatively new type of business entity. Under state law, an LLC is neither a partnership nor a corporation, but a new and different type of entity, created pursuant to statute. Limited Liability Company owners are referred to as "members" and have rights that are similar to those of corporate shareholders as well as being similar to partners in a partnership. In general, the members (owners) of an LLC are not personally liable for the company’s debts and obligations, just as corporate stockholders are not personally liable for the debts and obligations of the corporation. At the same time, however, a Limited Liability Company with two or more members usually qualifies for taxation as a partnership, i.e., flow-through taxation. (A single-member LLC will not be treated as a taxable entity distinct from its member.) As a result, the Limited Liability Company may offer the best of both worlds, which are limited liability similar to a corporation as well as the flexibility and tax advantages of a partnership.

How does a Limited Liability Company differ from a partnership?

The main difference is that the partners in a partnership are held personally liable for the debts and obligations of the partnership. In contrast, Limited Liability Company members are not personally liable for the company’s debts and obligations. Also, the Limited Liability Company statute creates specific rules for forming, operating, and managing of Limited Liability Companies, which may not apply to partnerships. For example, since an LLC is created pursuant to a specific registration process set forth in the statute, failure to go through that process essentially means that no Limited Liability Company exists. In comparison, a partnership can be created informally, without having to go through the statutory partnership registration process. Lastly, a partnership requires two or more partners, while a Limited Liability Company can be formed with a single member.

How does a Limited Liability Company differ from a Limited Partnership?

In a Limited Partnership, the limited partners have limited liability. However, every

Limited Partnership has to have at least one general partner, and that general partner is held personally liable for partnership debts. A Limited Liability Company is not required to have a "general partner”, which means that no member has to accept personal liability for debts of the entity. Also, limited partners may not participate in managing the partnership, or they lose their liability protection. Members of a Limited Liability Company, however, may participate in management without losing their liability protection.

How does a Limited Liability Company differ from a C corporation?

In a C corporation, the income tax applies at both the entity level and the owner level. In a Limited Liability Company, generally partnership taxation rules apply, and therefore the income tax will apply only at the owner level (although the entity must still file a partnership information return). Furthermore, corporate statutes generally provide less flexibility in structure and governance than the Limited Liability Company law does.

How does a Limited Liability Company differ from an S corporation?

In an S corporation, the double taxation that is inherent in a C corporation can be avoided, but various other restrictions apply (e.g., the "one class of stock" rule, and limits on the number and type of stockholders). A Limited Liability Company

normally offers more flexibility than an S corporation.

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