What is a Limited Liability Company (LLC)?

Limited liability companies (LLC) offer a unique hybrid model that combines the advantages of a limited company with the tax conditions of a partnership.

This model is most prevalent in the U.S., where it is permissible by federal statute, although each state may dictate different regulations regarding the establishment and management of each specific legal entity. The LLC concept is also accepted in the Isle of Man and several other countries.

LLC companies do not have share capital in the same sense as LTDs (limited companies) do. In an LLC the company capital is comprised of units and its owners are called “members” (not “shareholders”). Most U.S. states do not impose any restrictions regarding ownership of the company, so that owners may be individuals, companies, LLCs or other legal entities. In most cases the number of members is also unrestricted, and most states also allow single-member LLCs (meaning a single individual as sole owner). This model has no required board of directors and its office holders are simply called “managers”.

Some businesses are not permitted to incorporate as LLCs – among them banks and insurance companies.

In the U.S., the main advantage of establishing an LLC is the right of owners to determine its own tax classification – whether as a separate source of company income, as a partnership or as part of general company turnover. In fact, the tax authorities will treat the income of a single-member LLC as an entity disregarded as separate from its owner for income tax purposes (a “disregarded entity”), unless he/she specifically requests  to be treated as a corporation.

The incorporation of an LLC may be suitable for several circumstances:

• An important tool for possessors of assets – Some states require the purchase of assets, specifically real estate, through a local company.
• A tool for trade activity within U.S. market – Trade activity with the U.S. is usually conducted via American companies, and specifically LLCs. There are some circumstances in which incorporation of a local company is required in order to do business there.
• For the high-tech industry – Many startup and internet companies choose to incorporate as LLCs in the U.S., particularly in the state of Delaware where they enjoy several tax benefits. This is clearly evident when analyzing the registrar logs of the companies listed on the NASDAQ stock exchange in New York.

Office holders:

• Member – the owner/s of a company, whether individual, company or other legal entity.
• Manager – Similar to a director in a LTD, appointed to run the company’s day-to-day affairs. Company members may also be appointed as managers. Managers may be an individual and/or group or a legal entity of some kind, such as another LTD or LLC (unless expressively forbidden by state law).