An LLC (Limited Liability Company) is a business entity that shares characteristics with both partnerships and corporations.  The owners of an LLC are called “members.”

Like a partnership, an LLC is a flow-through entity that allows its members to enjoy pass-through income taxation.  In other words, the income of the entity is regarded as the income of the members.  This means that the LLC is treated as a disregarded entity for tax purposes, so there is no double taxation (taxes on the same income at the entity level and the shareholder level).

Like a corporation, an LLC provides its members with limited liability.  If an LLC is sued, the plaintiffs are suing the LLC, not the members. A member is not personally liable for the debts of the LLC.

In sum, an LLC combines some of the best features of partnerships and corporations.

Why LLC protection? The main benefit of an LLC is that it allows its members to choose its tax regime.  An LLC can elect to be taxed as a sole proprietor, partnership, S corporation, or C corporation if it would otherwise qualify for such tax treatment.  LLCs are thus highly flexible with respect to taxation.

LLCs also shield its members from personal liability for the LLC’s debts and claims. This means that creditors and other claimants can reach only the assets of the business itself and not the personal assets of the members, such as their homes or cars.  This does not mean, however, that an LLC’s members are entirely free from personal liability – in rare circumstances, a court can pierce the corporate veil when fraud or misrepresentation is involved.

You should consider forming an LLC if you think your business may expose you to personal liability.  LLC incorporation is the business entity that often makes the most sense for small businesses because an LLC is flexible and does not require as much administrative work and paperwork as a corporation.

How to form an LLC? In most states, you create an LLC by filing “articles of incorporation” (also called “certificate of organization” or “certificate of formation”) with the state’s LLC filing office.  You must also pay a filing fee.  Some states require that you publish an intention to form an LLC in a local newspaper prior to filing your articles of incorporation.

Rebecca Graham is a general practice and Chicago small business lawyer with G &G Law.