A limited liability company (LLC) is an entity formed under state statute which provides limited liability to its owners. Laws governing LLCs vary from state to state.
LLC owners are called members. These members can be individuals or other entities. Many LLCs designate a manager – either an individual or an entity – to oversee the firm’s operations. In contrast, a member-managed LLC grants each member the ability to make managerial decisions and to act as an agent of the company.
An LLC requires the members to file articles of organization with the state. In addition, most states require the LLC to file an annual report and pay a filing fee in order to maintain its active status.
Most states have no restrictions on the number of members an LLC can have. Most states also allow LLCs to be formed with a sole owner – known as a single-member LLC.
As a default, the IRS classifies an LLC as a partnership. However, the IRS allows LLCs to elect to be taxed as a C – or S – corporation.
Although not all states require one, it is prudent for an LLC to have a written operating agreement. Like a partnership agreement, the operating agreement states the rights and responsibilities of the members. A written operating agreement can be used for both multi-member and single-member LLCs.
An LLC is easier to form and requires less record keeping than a corporation. As such, LLCs have become the most common business structure for small businesses in the U.S.