What is a Limited Liability Company?

A limited liability company is a type of business organization that combines some aspects of a corporation with those of a sole proprietorship or partnership. As in a corporation, the personal liability of the company's members for the business's debts is limited — hence the name; unlike in a corporation, however, this type of business is not taxed as a separate entity. In the United States, it is often referred to as an LLC — many people incorrectly interpret this acronym to mean limited liability corporation. In the United Kingdom, an limited liability company is marked as Limited or Ltd., in contrast to public companies, which are referred to as PLC.

This type of business is a relatively new innovation in the United States, intended as a way to help small businesses gain many of the benefits enjoyed by corporations, while allowing them to retain their small business model of ownership. A traditional corporation requires a number of things that a limited liability company does not need to create. Corporations have shareholders, for example, and must meet a certain number of times per year at shareholder meetings to make decisions. An LLC does not have shareholders and does not require meetings. Similarly, it does not need to create a set of bylaws, though some states require an operating agreement in order to recognize the company.

The limited liability company model is widely considered to be an alternative to remaining as a sole proprietorship. For small businesses that are owned by one person, the tax benefits of being a sole proprietorship outweigh the liability-reducing benefits of incorporation. By gaining this status, however, these small businesses retain many of the perks of being unincorporated, while reducing their liability. A limited liability company may in fact choose its own tax status, deciding whether to be treated as a sole proprietorship, or an S or C corporation.

The limitations of liability are of course very important, and are the primary reason most small businesses choose to become an LLC. Once a sole proprietorship has been granted this status, the owner bears much less responsibility for prosecution and debt issues that the business may undergo. Declaring bankruptcy, for example, can be an enormous headache for a sole proprietorship, incurring serious personal consequences for the owner's credit rating. While bankruptcy is of course never cause for celebration, as a limited liability company, the owner need not worry about his or her personal finances becoming caught up in the business' problems.

While an LLC is the obvious choice for many business owners, for others it may not be worth it. While the accounting and paperwork involved in creating one and handling its taxes are substantially easier to deal with than those of a corporation, they are nonetheless more complex than those of a simple sole proprietorship or partnership. The decision to become a limited liability company should be carefully considered and discussed with the business accountant, but it is an option that any sole proprietorship which could potentially run into legal or economic trouble should look into.