Building a protective wall. © DNY59––iStock/Getty ImagesA limited liability company (LLC) is a business structure that combines the legal protections of a corporation with the flexibility and pass-through taxation of a partnership. Owners of an LLC are called members. There can be one member or many.

　　Formation and ownershipLLCs are formed at the state level by filing articles of organization and paying the required fee. State laws vary, and some do not allow licensed professionals—such as doctors, accountants, or lawyers—to form LLCs. In those cases, a professional limited liability partnership (LLP) may be available.

　　Members can manage the business themselves (member-managed) or appoint managers to run it (manager-managed). LLCs are popular among small business owners, real estate investors, and joint ventures because they offer flexibility in ownership and decision-making.

　　Liability protectionOne of the main advantages of an LLC is limited liability. Members are generally not personally responsible for the company’s debts or obligations; only the assets owned by the LLC are at risk. Personal liability can still arise in cases of fraud, personal negligence, or when members personally guarantee a debt.

　　Tax treatmentFor federal tax purposes, an LLC is not recognized as a separate taxable entity unless it elects corporate taxation. By default, a single-member LLC is taxed like a sole proprietorship; a multi-member LLC is taxed like a partnership. Profits and losses “pass through” to members’ personal returns, reported via Schedule C (single-member) or Schedule E with a Schedule K-1 (multi-member). LLCs can also file paperwork to be taxed as a C corporation or S corporation if that better suits their financial strategy.

　　Nancy Ashburn