LLC Basics

Limited liability companies combine the best aspects of partnerships and corporations.

A limited liability company (LLC) combines the corporation's protection from personal liability for business debts and the pass-through tax structure of a partnership or sole proprietorship. And, while setting up an LLC is more difficult than creating a partnership or sole proprietorship, running one is significantly easier than running a corporation.

Here are the main features of an LLC:

Limited Personal Liability

Like shareholders of a corporation, all LLC owners are protected from personal liability for business debts and claims. This means that if the business itself can't pay a creditor—such as a supplier, a lender or a landlord—the creditor cannot legally come after any LLC member's house, car or other personal possessions. Because only LLC assets are used to pay off business debts, LLC owners stand to lose only the money that they've invested in the LLC. This feature is often called "limited liability."

Exceptions to Limited Liability

While LLC owners enjoy limited personal liability for many of their business transactions, this protection is not absolute. This drawback is not unique to LLCs, however—the same exceptions apply to corporations. An LLC owner can be held personally liable if he or she:

• Personally and directly injures someone
• Personally guarantees a bank loan or a business debt on which the LLC defaults
• Fails to deposit taxes withheld from employees' wages
• Intentionally does something fraudulent, illegal or reckless that causes harm to the company or to someone else
• Treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity

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