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Limited Liability Company (LLC)

A business form that shields its owners from most business debts while staying simpler to run than a corporation.

Informational only - this is not legal advice. These definitions explain general legal vocabulary in plain English. They are not advice about your situation, reading them creates no attorney-client relationship, and the law differs from state to state and changes over time. For advice you can rely on, speak to a lawyer licensed in your state.

What it means

An LLC is a business entity created by filing with a state. Its central feature is in the name: the owners, called members, are generally not personally liable for the company's debts, so a creditor of the business ordinarily reaches the business's assets rather than the members' homes and savings.

The protection is real but conditional, and the condition is the part most often missed. It depends on the LLC actually being operated as a separate entity - separate bank accounts, records kept, formalities observed, and the company adequately funded for what it does. Where an owner treats the company as a personal account, a court may disregard the separation entirely. Nor does the shield cover a member's own wrongdoing, or a debt the member personally guaranteed, which is what most lenders to a small LLC will require.

Federal tax treatment is separate from liability and is largely elective: an LLC is not a tax category of its own, and the same entity can be taxed in more than one way depending on what is elected and how many members it has.

Where this comes from

LLCs are creatures of state statute - formation, the required filings, default management rules and the standards for disregarding the entity are all set state by state, and many states have adopted versions of a uniform act with local amendments. Federal tax classification is elective under the Treasury "check-the-box" regulations rather than fixed by the entity form.

When people hire a lawyer for this

The two things worth advice are the operating agreement and the separation discipline. Default state rules apply to anything the agreement does not address, and those defaults frequently do not match what co-owners assumed about control, profit splits or what happens when someone wants out - which is discovered at the worst moment. Forming the entity is the easy part and is not where the risk is.

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Part of the LawyerLand plain-English legal glossary. Definitions are written from primary sources - statutes and court rules - and each entry states the authority it rests on, or says plainly when the doctrine is state law with no national rule.

If you cannot afford a lawyer, civil legal aid programmes provide free help with many of these problems: civil legal aid programmes by state.