Limited liability company

"LLC" redirects here. For other uses, see LLC (disambiguation).
This article is about the United States-specific business entity form. For privately-held limited liability companies in general, see Private limited company. For limited liability companies in general, see Limited company.

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A limited liability company (LLC) is the United States-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.[1] An LLC is not a corporation under the laws of every state; 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,[2] and, under certain circumstances, LLCs may be organized as not-for-profit.[3] 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).[4]

An LLC is a hybrid 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 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 pass-through income taxation. As a business entity, an LLC is often more flexible than a corporation and may be well-suited for companies with a single owner.[5]

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". An owner of an LLC is called a "member", rather than a "shareholder".[6] 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 percentages), rather than represented by "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."[7]

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 theories as corporate shareholders.[8] 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 commingle funds, it is difficult to pierce the LLC veil.[9][10] 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.[11]

Limited liability company members may, in certain circumstances, also incur a personal liability in cases where distributions to members render the LLC insolvent.[12]

  1. ^ Schwindt, Kari (1996). "Limited Liability Companies: Issues in Member Liability". UCLA Law Review. 44: 1541.
  2. ^ "Limited Liability Company (LLC)". Internal Revenue Service. Retrieved October 9, 2019.
  3. ^ McCray, Richard A.; Thomas, Ward L. "Limited Liability Companies as Exempt Organizations" (PDF). Internal Revenue Service. Retrieved October 9, 2019.
  4. ^ Akalp, Neil (August 10, 2016). "Should You Structure Your Accounting Firm as an LLC, PLLC or PC?". Accounting Today. SourceMedia. Retrieved October 9, 2019.
  5. ^ Bischoff, Bill (May 1, 2017). "The advantages of owning real estate in a single-member LLC". MarketWatch, Inc.
  6. ^ Johnston, Kevin. "What Is the Difference Between a Shareholder Vs. a LLC Member?". Hearst Newspapers, LLC. Houston Chronicle. Retrieved October 9, 2019.
  7. ^ Friedman, Scott E. (1996). Forming Your Own Limilted Liability Company. Dearborn Trade Publishing. p. 60. ISBN 9780936894935.
  8. ^ Macey, Jonathan R. (March 27, 2014). "The Three Justifications for Piercing the Corporate Veil". Harvard Law School Forum on Corporate Governance.
  9. ^ Klein, Shaun M. (1996). "Piercing the Veil of the Limited Liability Company, from Sure Bet to Long Shot: Gallinger v. North Star Hospital Mutual Assurance, Ltd". Journal of Corporate Law. 22: 131.
  10. ^ Vandervoort, Jeffrey K. (2004). "Piercing the Veil of Limited Liability Companies: The Need for a Better Standard". DePaul Business and Commercial Law Journal. 3: 51.
  11. ^ Adkisson, Jay (April 30, 2013). "The Misunderstood Charging Order". Forbes.
  12. ^ See, e.g., "Delaware Code, Title 6, Chapter 18, Limited Liability Company Act". State of Delaware. Retrieved October 9, 2019.