What kinds of liability does a Limited Liability Company protect against?

A member in a Limited Liability Company is shielded from vicarious liability, i.e., liability arising out of the acts of others. The member is not shielded from liability that arises out of his own acts or omissions. For example, two doctors (A and B) form a Limited Liability Company to practice medicine. Doctor A treats patient Darby, and commits malpractice. Doctor B is not involved in the treatment of patient Darby. Therefore, Doctor B will not be jointly liable to Darby simply because Doctor B is a co-member of the Limited Liability Company with Doctor A. But, Darby can sue Doctor A, and Doctor A will not be protected by the LLC structure from liability. The Limited Liability Company only protects against explicit liability, not against liability for one's own acts.

How is a single-member Limited Liability Company taxed?

Normally, a single-member Limited Liability Company is a "disregarded entity" for tax purposes – i.e., the existence of the Limited Liability Company is ignored, and for tax purposes the business is treated as conducted by the member. For an individual, a Limited Liability Company's operations would be included on the individual's tax return, usually on Schedule C. If the member is a corporation or other entity, the Limited Liability Company's operations would be included in the tax return of the corporation or other entity. The disregarded entity treatment applies unless the Limited Liability Company positively elects to be taxed as a corporation instead. That election can be made by filing IRS Form 8832.

Does the IRS ever treat a "disregarded entity" as a separate entity?

Although a single-member Limited Liability Company is generally disregarded for the purpose of taxing the income generated by it, the IRS recognizes that, under state law, the Limited Liability Company is a separate and distinct entity, with liabilities distinct from the liabilities of the sole member. Therefore, for purposes of liens, levies, and collections, assets held by the Limited Liability Company are not treated as if they were owned directly by the sole member, nor are assets held by the member treated as if they were owned by the Limited Liability Company.

How is a multiple-member Limited Liability Company taxed?

A Limited Liability Company having two or more members is a partnership for tax purposes, unless the Limited Liability Company elects (by filing IRS Form 8832) to be treated as a corporation.

If a Limited Liability Company is owned by a husband and wife, are they counted as two members?

In IRS Publication 541 and in Rev. Proc. 2002-69, the IRS takes the position that a husband and wife owning a Limited Liability Company as community property count as a single owner for purposes of the disregarded entity rule. Should they choose to file a partnership return for the Limited Liability Company the IRS will accept the position that the company is a partnership for tax purposes. If the Limited Liability Company interest is not community property, the husband and wife constitute two owners. However, in Publication 541, the IRS says that a husband and wife can choose to classify the Limited Liability Company as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor.

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