A limited liability company is a form of business organization that is treated like a partnership for income tax purposes and like a corporation for liability purposes. Generally, an LLC is a legal entity formed under a statute, other than a partnership or corporation statute, that allows one or more owners to carry on a business with none of the owners having personal liability for the obligations of the business. The nontax characteristics of an LLC are limited liability for its owners (like a corporation) and freedom to structure management rights and financial interests in the entity in virtually any configuration the parties wish (like a partnership). Most often, an LLC will elect to be treated as a partnership for income tax purposes, in which case the income, gains, losses, deductions, and credits of the LLC generally will flow through to its members for reporting on their personal tax returns.

Advantages Over Limited Partnership

Although a limited partnership allows pass-through tax treatment, flexibility in financial structuring, and limited liability for limited partners, at least one person, i.e., a general partner, must be fully liable for the obligations of the business, and limited partners may not take part in the control of the business without jeopardizing their limited liability. Unlike a limited partnership, no LLC owner ("member") need be personally liable for the company's obligations, and each member is permitted to manage the company and to take part in the control of its business without losing the member's limited liability.

Advantages Over S Corporation

Although an S corporation allows pass-through tax treatment and limited liability for all owners, an S corporation limits the parties' flexibility in structuring their financial arrangements because of the requirements that the corporation have no more than one class of stock and that items of income, gain, loss, deduction, or credit be taken into account in accordance with the shareholders' pro rata share of the corporation's stock. Furthermore, only individuals, estates, certain types of trusts, and certain tax-exempt organizations are eligible S corporation shareholders, and an S corporation will lose its pass-through tax treatment if an ineligible entity becomes a shareholder. Finally, the pass-through income tax treatment offered by an S corporation differs somewhat from that of a partnership, and this differential treatment can sometimes have adverse tax consequences. An LLC can have different classes of ownership; income, gain, loss, and other items may be allocated disproportionately to ownership without affecting the LLC's pass-through tax treatment. Unlike an S corporation, any "person"—i.e., any individual, partnership, limited partnership, trust, estate, association, corporation, other limited liability company, or other entity, whether domestic or foreign—can be a member of an LLC.