What is an LLC?

The simple definition of a limited liability company (LLC) is that it is a form of business entity that limits the liability of its owners while allowing flexibility in operation and management and passing through its income to its members with no tax at the entity level.

Well, that’s a pretty easy definition of an LLC, but it leaves a lot of queations unanswered. So, really, what is a limited liability company?

Basic Features of an LLC

The basic features of a limited liability company are:

  • Its owners have limited liability for the entity’s debts and obligations, similar to the status of shareholders in a corporation, and
  • Its income and losses are normally passed through to the owners as if it were a partnership.

The LLC is probably most like a limited partnership, but without the requirement that there be at least one general partner liable for the debts and obligations of the partnership.

An LLC is a statutory creation. That is, unlike general partnerships which developed under common law, an LLC, like a corporation, is created by filing a document (usually called Articles of Organization) with an officer designated by state law. As the LLC is a statutory entity, the laws governing the LLC set up a particular ramework of rules for the operation and management of the LLC. Generally, most of the statutory rules are considered to be fallback provisions which take effect only if the LLC’s operating agreement doesn’t provide for guidance on a particular point.

The LLC – a Newcomer

The LLC is a relatively new business entity, at least in the United States. Business entities that bear strong similarities to limited liability companies existed in some European countries, but the first modern LLC statute in the United States was adopted by the Wyoming legislature in 1977. At first, the novel entity was slow to gain acceptance. The second state to enact a limited liability company act was Florida in 1982, five years after Wyoming’s act. However, in the 1990’s the popularity of the LLC snowballed and by 1997, every state and the District of Columbia had passed statutes allowing the formation of limited liability companies.