How LLCs Work
Think of an limited liability company (LLC) as a partnership on steroids. If you and a buddy were to get together and start a business without registering it as any particular business structure with the state, your business would automatically be considered a general partnership.
All business income and losses would be reflected on your personal tax returns. No rigid formalities would be required — you could literally draft your agreements on a napkin.
The problem is, what happens if you want to raise capital? The business is comprised of only you and your partner, and possibly some assets that you’ve acquired along the way. You can’t exactly sell pieces of yourself.
Or what if your partner ends up being, well, a jerk? Or even worse, a jerk who runs up a lot of debts that you could be personally responsible for? Eek! As unfair as it sounds, that’s the reality for partnerships. Until the LLC came along, that is.
The LLC takes all the best features of a partnership (pass-through taxation and no hefty burdens of corporate formalities) and the best features of a corporation (personal liability protection and ownership shares) and then adds a few extra perks for good measure, like the capability to choose your own form of taxation and a formal yet flexible management structure.
In addition, the LLC can offer a second layer of liability protection that shields the business from any personal lawsuits that may befall you (referred to as charging order protection).