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Limited Liability Entities
The concept of limited liability involves the fact that as a general rule, the investors of a corporation have limited liability. The investors' risk is generally limited to their equity investment in the company. This means that owners have no personal liability for the debts of the organization.
Limited Liability Company
A limited liability company (LLC) is considered to be a hybrid entity that combines some of the more desirable characteristics of a corporation, a limited partnership and a general partnership. LLCs offer the flexibility and tax advantages of a partnership or a proprietorship along with the limited personal liability of a corporation. Specifically, LLCs are entitled to partnership status for federal income taxes. This enables LLCs to avoid double taxation familiar to corporations and their stockholders. Under state law, an LLC is a separate legal entity, distinct from its members and as is the case with a corporation, the investors in an LLC generally enjoy limited liability.
The owners in an LLC are called "members" who share in the profits of the entity [similar to partners in a partnership] and managers who generally do not have a financial stake in the business but are responsible for the day-to-day operation of the business. In the United States, each State can establish statutes regulating the formation and operation of LLCs. LLC profits are taxed as income to the members rather than being taxed by the corporation and again when distributed to shareholders. In other words, owners are shielded from personal liability and profits and losses from an LLC pass directly to the owners without taxation being paid by the business entity itself.
Limited Liability Partnership
A limited liability partnership (LLP) is a partnership in all respects except that there are detailed limitations on the liability of certain partners, which are described in the partnership agreement. LLPs are popular among professionals such as doctors, lawyers, and accountants. More traditional business organizations, however, often opt to become Limited Liability Corporations (LLCs).
Edited by Michael C. Dennis. Mr. Dennis is a consultant and the author of "1001 Collections Tools and Tips."