A limited liability company (LLC) is a business form that combines the limited liability features of a corporation with the tax advantages available to the sole proprietor or partnerships. A LLC generally enjoys the same limited liability shield enjoyed by a corporation. The owners of an LLC can also enjoy all the tax features accorded to sole proprietors or partners in a partnership.

Advantages of an LLC
An LLC generally can be viewed as a hybrid entity combining the characteristics and, more importantly, the benefits of a corporation and a partnership. A properly structured LLC will be taxed as a partnership. This means there will only be one level of taxation, not the two layers of taxation that occur with a C corporation, and this benefit can be obtained without the complexity and restriction of an S corporation.

With limited liability for its members, an LLC resembles a corporation. The owners of an LLC, like shareholders of a corporation, are generally not responsible for the debts and obligations of the LLC beyond their contributions to the LLC. An LLC, however, if properly structured, is not taxed at the entity level like a corporation; instead, an LLC's profits are taxed on its owners' individual tax returns, like partners in a partnership.

A third and equally important benefit of an LLC is that all its members can manage and control the business without causing the LLC to be taxed as a corporation. Members of an LLC can directly participate in the company's management or can elect managers to manage the business. The members' ability to participate in the LLC's management distinguishes LLCs from limited partnerships, where there is a risk of losing one's limited liability by managing the business. Many of an LLC's benefits are available without the various restrictions faced by corporations and partnerships.

Disadvantages of LLCs
While the LLC can solve many of the problems associated with the aforementioned business entities, it does not eliminate all problems of business owners. For most closely held small businesses, the principal owners likely will be required to personally sign leases, bank loans and other legal documents, and provide personal guarantees, no matter whether the business is a corporation, partnership or LLC. Thus, an important practical limitation on achieving limited personal liability of a business's owners will remain despite using the LLC format. In addition, there are certain liabilities for which the members can still be liable, such as the nonpayment of payroll taxes that have been withheld from employees' wages and not turned over to the IRS or the state taxing authorities. The same holds true for sales taxes and certain environmental liabilities.

How to set up a LLC?
An LLC is formed when the organizer files an articles of organization with the state.  An LLC can also have an operating agreement among its members governing its operation and management.
 

LLC compared to other forms of business
For small businesses, LLCs have some advantages over other business forms, such as corporations and partnerships.

LLCs address many practical concerns faced by closely held small businesses. These businesses uniformly wish to have limited liability for their owners. To accomplish this objective, they have had to organize either a "C" corporation and face double taxation, or an "S" corporation and face severe restrictions on the structure of equity interests and shareholder numbers and characteristics.  

Partnerships can be used to achieve a single level of taxation. With a general partnership, however, there is personal liability for all partners. In a limited partnership, at least one partner must be liable for the business's debts. A solution is to use a limited partnership with a corporate general partner. In this scenario the partner that is liable is the corporation. This requires the formation of two entities (a corporation as a general partner and the limited partnership itself) and the resulting complications, multiple tax returns and costs.