A limited liability company (LLC) is a business structure in which the company in question is jointly owned by all the members of the LLC and in which the owners of the company are protected from being held personally liable for the debts and liabilities of the business itself.
The exact structure and proportion of ownership is determined in a membership agreement. If an LLC is correctly incorporated and legally operated, each of the members of the LLC are protected from personal liability for the debts and obligations of the LLC. Generally, the income generated by the LLC flows directly to its members, which is taxed as personal income unless the LLC is subject to taxation as a C-Corp.
The actual operation of an LLC is very flexible. Operational details are spelled out in the LLC operating agreement: how profits are shared, how tax liabilities are divided among members, and how the day-to-day operations of the LLC are run, and more. However, the fact that an LLC is usually treated as a pass-through entity for tax purposes makes it an unattractive investment prospect. The structure does not allow for investor protections (such as those offered by preferred shares in the case of corporations) and pose increased tax liabilities for potential investors. If you are looking to raise funds, therefore, an LLC is probably not an advisable option. If you are looking to maintain flexible operations while insulating yourself from personal liability, an LLC may be a great option.
Startup Founder: “I want to create a company but I want to separate my personal assets from it.”
Attorney: “An LLC is the perfect formation if you don’t want to be held personally liable for the losses and debts of your business.”
Startup Founder: “Great! Now, what do you know about trying to adequately finance the launch of a dog’s-only cupcake shop?”