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limited liability company (LLC)

business
Also known as: LLC
Written byNancy Ashburn
Nancy Ashburn
As a 30+ year member of the AICPA, Nancy has experienced all facets of finance, including tax, auditing, payroll, plan benefits, and small business accounting. Her résumé includes years at KPMG International and McDonald’s Corporation. She now runs her own accounting business, serving several small clients in industries ranging from law and education to the arts.
Fact-checked byThe Editors of Encyclopaedia Britannica
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Encyclopaedia Britannica's editors oversee subject areas in which they have extensive knowledge, whether from years of experience gained by working on that content or via study for an advanced degree. They write new content and verify and edit content received from contributors.
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A limited liability company (LLC) is a business structure that combines the legal protections of a corporation with the flexibility and pass-through taxation of a partnership. Owners of an LLC are called members. There can be one member or many.

Part of a bigger picture

A limited liability company is just one of the many business structures available. Learn how corporations, partnerships, sole proprietorships, and others compare in Britannica Money’s guide to business structure types.

Formation and ownership

LLCs are formed at the state level by filing articles of organization and paying the required fee. State laws vary, and some do not allow licensed professionals—such as doctors, accountants, or lawyers—to form LLCs. In those cases, a professional limited liability partnership (LLP) may be available.

Members can manage the business themselves (member-managed) or appoint managers to run it (manager-managed). LLCs are popular among small business owners, real estate investors, and joint ventures because they offer flexibility in ownership and decision-making.

 A brief history of the LLC

The LLC is a relatively new form of business organization in the United States. Wyoming passed the first LLC statute in 1977, inspired in part by similar entities used in European and Latin American countries. The structure gained traction in the late 1980s and early 1990s, especially after the IRS clarified in 1988 that LLCs could receive partnership-style tax treatment while offering corporate-style liability protection. By 1996, all 50 states had enacted LLC laws, making the LLC one of the fastest-adopted business structures in U.S. history.

Liability protection

One of the main advantages of an LLC is limited liability. Members are generally not personally responsible for the company’s debts or obligations; only the assets owned by the LLC are at risk. Personal liability can still arise in cases of fraud, personal negligence, or when members personally guarantee a debt.

Tax treatment

For federal tax purposes, an LLC is not recognized as a separate taxable entity unless it elects corporate taxation. By default, a single-member LLC is taxed like a sole proprietorship; a multi-member LLC is taxed like a partnership. Profits and losses “pass through” to members’ personal returns, reported via Schedule C (single-member) or Schedule E with a Schedule K-1 (multi-member). LLCs can also file paperwork to be taxed as a C corporation or S corporation if that better suits their financial strategy.

Nancy Ashburn