Limited Liability Company (LLC)
A limited liability company, or LLC, is a legal entity owned by one or more members. The limited liability company is separate and distinct from its members, and the members generally enjoy the same limitations on personal liability that protect stockholders of a corporation.
A limited liability company formed under Delaware law is governed by an implied, oral or written limited liability company agreement, also know as an operating agreement, among its members, subject to the Delaware Limited Liability Company Act, 6 Del. C. §§ 18-101 et seq. (the “LLC Act”). In Delaware, limited liability companies are formed by filing a certificate of formation with the Secretary of State. The LLC Act grants limited liability companies great flexibility in establishing rules of internal governance. Many provisions of the LLC Act are “default” provisions; that is, they control only when the operating agreement does not specify otherwise.
The flexibility of the LLC Act allows members to tailor a limited liability company to their specific needs. Members may be of different classes, with different rights and/or responsibilities. A limited liability company may be governed directly by its members or by a manager or group of managers who may or may not have a membership interest in the LLC. Membership interests may be divided up by percentage, or may be distributed in the form of units of interest that function similarly to shares of stock in a corporation.
Normally, a limited liability company pays no federal or state income tax on its income; members instead pay income tax on their proportional share of the company’s income. However, the members may opt to pay taxes in a manner similar to a corporation, either an S corporation or a standard corporation, if they determine that such an arrangement is financially advantageous. A limited liability company must file an election form with the IRS if it wishes to be taxed as a corporation.