LLC stands for limited liability company. In a manner similar to a corporation, the owners of an LLC have limited liability, on a personal basis, for the debts and actions of the LLC. What that means is that if a business organized on an LLC basis goes bankrupt, the owners, know as members, are not personally required to make good on the debts run up by the LLC out of their personal savings, nor will they lose their homes. Only the assets owned by the business, the LLC itself, are liable to seizure by the creditors through the courts.
There are similarities between LLC’s and corporation, but there are also important differences. For example, the profits of a corporation must be distributed in proportion to percentage of ownership each member holds, while in LLC's, the earnings can distributed in any way that the members have agreed on. If there are losses instead of profits, they are factored directly into the members’ personal income taxes, where they are often deductible. The LLC’s debt can also often reduce each member’s federal income tax obligation.
One very important advantage of the LLC method of organization is the avoidance of double taxation. A corporation pays taxes on its profits. Then, when the profits are paid to the members, they pay taxes again, this time as individuals when they pay their personal income taxes each year.
Under one common set of circumstances, an LLC has no separate tax filing at all. If an individual, or two spouses filing a joint return are the only members, then as far as the feds are concerned, the LLC is a "disregarded entity." What this means is that no separate taxes must be filed for the LLC, it can all be taken care of either in the individual tax returns or the joint return, as the case may be. It is important to note that if this “pass through” method is chosen the income is subject to self-employment taxes.
Taken as a whole, there is far less paperwork and governmental reporting requirements for an LLC than there is for a corporation. There is no requirement for an annual meeting, no need for a formal board of directors or for an expensive, time consuming annual report.
One little known fact about LLC's is, like corporations, they are enduring legal business entities. What that means is that if the owner dies, the LLC lives on. This avoids the tricky legal issues involved with the death or disability of the owner when the entity is a sole proprietorship.
One notable disadvantage to the LLC form of organization is that there is wide range of differences in the rules that each of the fifty states have in place with regard to LLC's. This could be a difficulty for an LLC that operates in more than one state. The other major disadvantage is that LLC's can’t issue stock shares as a way expanding ownership and raising funds; however, it can raise fund by selling memberships. These new memberships can be sold with restricted management prerogatives and more limited abilities to share in profits.