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The limited liability company (LLC) is a hybrid form of business enterprise that combines the pass- through tax benefits of S corporations and partnerships with the limited liability of limited partners and corporate shareholders. Like the limited partnership and the corporation, an LLC must be formed and operated in compliance with state law. To form an LLC, articles of organization must be filed with a central state agency, such as the secretary of state's office. The business's name must include the words "Limited Liability Company" or the initials "L.L.C."
A major advantage of the LLC is that, as indicated, it does not pay taxes as an entity. Rather, profits are "passed through" the LLC and paid personally by the owners of the company, who are called members instead of shareholders. Another key advantage is that the liability of members is limited to the amounts of their investments. In an LLC, members are also allowed to participate in management activities, and under some state statutes, the firm's managers need not even be
members of the LLC. Yet another advantage is that corporations and partnerships, as well as
foreign investors, can be LLC members.
Additionally, in contrast to S corporations, there is no limit on the number of members of the
LLC. Finally, part of the LLC's attractiveness to businesspersons is the flexibility it offers.
The members can themselves decide how to operate the various aspects of the business through a simple operating agreement.
The disadvantages of the LLC are relatively few, so this form of organization has become very popular for smaller, privately held companies. Generally, the major disadvantage has been the lack of uniformity among state statutes with respect to LLCs. The differences among the states are disappearing, however.