An LLC, or limited liability company, is a U.S. business structure that combines the simplicity, flexibility and tax advantages of a partnership with the personal liability protection of a corporation. Owners of LLCs are called members.

What is an LLC?
An LLC can have one or many “members,” the official term for its owners. Members can be individuals or other businesses, and there is no limit to the number of members an LLC can have. With an LLC structure, members' personal assets are protected from the business's creditors.

Benefits of an LLC
Structuring your business as an LLC offers a number of advantages.

Limited liability
Members aren’t personally liable for actions of the company. This means the members’ personal assets — homes, cars, bank accounts, investments — are protected from creditors seeking to collect from the business. This protection stays in as you run your business on the up-and-up and keep business and personal financials separate.

Pass-through federal taxation on profits
Unless it opts otherwise, an LLC is a pass-through entity, meaning its profits go directly to its members without being taxed by the government on the company level. Instead, members pay tax on the profits on their own federal income tax returns.

This makes filing taxes easier than if your business were taxed on the corporate level.

If your business loses money, you and other members can shoulder the hit on your own tax returns and lower your tax burdens.

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Management flexibility
Members can manage an LLC, which allows all owners to share in the business’s day-to-day decision-making. Alternatively professional managers, who can be either members or outsiders, can manage the business. This is helpful if members want to hire people who are more experienced running a business.

In many states, an LLC is member-managed by default unless explicitly stated otherwise in filings with the secretary of state or the equivalent agency.

Easy startup and upkeep
Initial paperwork and fees for an LLC are relatively light, though there is wide variation in what states charge in fees and taxes. The process is simple enough for owners to handle without special expertise, though it’s a good idea to consult a lawyer or an accountant for help. Ongoing requirements usually come on an annual basis.

Disadvantages of an LLC
Before registering your business as an LLC, consider these possible drawbacks.

Limited liability has limits
A judge can rule that your LLC structure doesn’t protect your personal assets. The action is called “piercing the corporate veil,” and you can be at risk if, for example, you don’t clearly separate business transactions from personal transactions or if you run the business fraudulently in ways that caused losses for others.

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Self-employment tax
The IRS considers LLCs as partnerships for tax purposes, unless members opt to be taxed as a corporation.

If your LLC is taxed as a partnership, the government considers members who work for the business to be self-employed. This means those members are personally responsible for paying Social Security and Medicare taxes, which are collectively known as self-employment tax, based on the business’s total net earnings.

If your LLC files forms with the IRS to be taxed as an S corporation, you and other owners who work for the company pay Social Security and Medicare taxes only on your actual compensation rather than on all the company’s pretax profits.