LLC (Limited Liability Company)
Definition
An LLC (Limited Liability Company) is a formal business structure created under state law that legally separates the business entity from its owners. It provides the owners (called members) with "limited liability," meaning their personal assets—like their house, personal bank accounts, and car—are generally protected if the business is sued or accrues debt.
Why it matters
For most small business owners, an LLC is the perfect middle ground between a sole proprietorship and a corporation. A sole proprietorship offers zero liability protection (you and the business are legally the same entity). A corporation offers liability protection but involves strict administrative rules and "double taxation."
An LLC provides the liability protection of a corporation while allowing "pass-through" taxation. This means the LLC itself does not pay federal income tax; instead, the profits pass through directly to the owners' personal tax returns, keeping accounting simple.
Example
Sarah starts a freelance graphic design business. Initially, she operates as a sole proprietor. One of her clients sues her for $50,000 claiming her design caused them financial loss. Because she is a sole proprietor, the client can legally go after Sarah's personal savings account to satisfy the judgment.
If Sarah had formed "Sarah Designs, LLC" before taking on the client, the client could only sue the LLC. Sarah's personal savings, home, and car would be shielded by the LLC's "corporate veil."