What Is a Limited Liability Company? - Definition, Benefits & Examples

What Is a Limited Liability Company? - Definition, Benefits & Examples
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  • 0:05 Limited Liability Company
  • 1:52 Tax Advantage
  • 3:23 Liability Advantage
  • 5:33 Lesson Summary
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Lesson Transcript
Instructor: Ashley Dugger

Ashley is an attorney. She has taught and written various introductory law courses.

A limited liability company is a popular business structure that provides the benefits of both a partnership and a corporation. This lesson explains the benefits of limited liability companies.

Limited Liability Company

Many companies are structured as limited liability companies, or LLCs. The LLC is a newer business structure that provides several benefits to its members. LLCs are governed by the individual states and are recognized in all states. They are organized by filing with the appropriate state government office, though state laws regarding LLCs vary. In all states, an LLC is a combination of a partnership and a corporation, though it's technically neither. An LLC allows the pass-through taxation of a partnership with the limited liability of a corporation.

Note that the owners of the company are referred to as members. An LLC can usually be started with just one member, and there's no upper limit on the number of members an LLC may have. Unlike limited partners, LLC members can fully participate in everyday business operations while still enjoying limited liability.

Many well-known companies are structured as LLCs. For example, Anheuser-Busch, Blockbuster and Westinghouse are all organized as limited liability companies. Let's take a look at how LLCs work by looking at an example. Let's say that Ben, Bob and Brandi are starting a company. They'll be opening The Book Nook, LLC.

Tax Advantage

Limited liability companies, like The Book Nook, provide two main advantages, both of which come from other popular business structures. First, LLCs provide pass-through business profits like a partnership. This means that the LLC and business profits aren't separately taxed. The IRS doesn't treat the company as a separate tax entity. Instead, the profits flow through or pass through directly to the members. The business profits become the members' income. The members then file their own tax returns and pay income tax on their individual income.

For example, let's say that Ben, Bob and Brandi agree to split all business profits equally. The Book Nook makes $75,000 net profit in its first year. Ben takes $25,000 for his income, Bob takes $25,000 for his income and Brandi takes $25,000 for her income. The Book Nook won't pay taxes on its $75,000 profit. Instead, Ben, Bob and Brandi will each pay income taxes on their $25,000 shares.

Liability Advantage

Now let's turn to the second major advantage LLCs provide their members. LLCs provide full limited liability like a corporation. That sounds like an oxymoron, so let's take a closer look. Limited liability companies, like The Book Nook, allow their members full exemption from personal liability for business debts and obligations. This means that the company can only be held responsible up to the amount of the company's assets much like a business bankruptcy.

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