Limited Liability Company (LLC)

Lesson

A Limited Liability Company (LLC) is a type of business entity that combines the features of a corporation and a partnership. It provides limited liability protection to its owners (called members). It allows for pass-through taxation, which means that the profits and losses of the business are reported on the members' tax returns. In this sub-section, we will explore the characteristics of an LLC, its advantages and disadvantages, and how it compares to other business entities.

Practice Question #1

Which of the following is NOT a characteristic of a Limited Liability Company (LLC)?

A) Limited liability protection

B) Pass-through taxation

C) Double taxation

D) Flexibility in management

Select an option above to see an explanation here.

A) Limited liability protection is a crucial feature of an LLC. B) Pass-through taxation is another characteristic of an LLC. C) Double taxation is a feature of corporations, not LLCs. D) Flexibility in management is an advantage of an LLC.

Terms

Limited Liability Company (LLC):: A business structure that combines a corporation's limited liability protection with a partnership's tax benefits.
Members:: The owners of an LLC.
Asset protection:: An LLC's limited liability feature protects its members' personal assets from business debts and liabilities.

Practice Question #2

What document is filed with the state to create an LLC?

A) Operating agreement

B) Articles of Incorporation

C) Articles of Organization

D) Partnership agreement

Select an option above to see an explanation here.

A) The operating agreement outlines the rules and regulations governing an LLC but is not filed with the state. B) Articles of Incorporation are filed to create a corporation, not an LLC. C) Articles of Organization are the legal document filed with the state to create an LLC. D) A partnership agreement establishes a partnership, not an LLC.

Do Not Confuse With

Corporation:: A separate legal entity that provides limited liability protection to its shareholders but is subject to double taxation.
Partnership:: A business entity with two or more owners that do not provide limited liability protection and are subject to pass-through taxation.
Sole proprietorship:: A business entity with a single owner that does not provide limited liability protection and is subject to pass-through taxation.

Practice Question #3

Which of the following is a key characteristic of a Limited Liability Company (LLC)?

A) Unlimited liability for all members

B) Limited liability for all members

C) No pass-through taxation

D) Requirement to issue stock

Select an option above to see an explanation here.

A) Incorrect, as LLC members have limited liability, not unlimited. B) Correct, as a key characteristic of an LLC is limited liability for all members. C) Incorrect, as LLCs typically have pass-through taxation. D) Incorrect, as LLCs do not issue stock.

Historical Example

In the late 1970s, Wyoming became the first state to enact legislation allowing LLC formation. This new business structure was created to provide small business owners with the limited liability protection of a corporation while avoiding the double taxation issue. Over the next two decades, all 50 states adopted LLC legislation, making it a popular choice for small businesses and entrepreneurs.

Practice Question #4

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