What is an LLC?

Updated March 1, 2022

LLC is short for limited liability company, a common business structure and legal entity in the U.S. that protects the owners of the business from personal liability if something goes wrong.

Introduced in 1977, LLCs are a blend of a partnership—which is a simple business formation of two or more owners—and a corporation, which has certain liability protections but is more complicated to form than an LLC.

An LLC can have one or many “members,” which is the official term for its owners, and members can be individuals or other businesses. LLC members are not personally liable for the actions of the company, meaning that members’ personal assets—their homes, cars, investments and bank accounts—are protected from creditors and lawsuits. If an LLC has unpaid debts, creditors can only go after the company’s assets, not the personal assets of the company’s owners.

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An LLC can choose to be managed by its members, which allows them to share in the day-to-day decision-making, or by managers, who can be either members or outsiders. LLCs are regulated at the state level, and the rules on their creation and the fees involved vary from U.S. state to state. 

LLCs are a popular structure for real estate companies involved in buying, selling or renting residential or commercial properties. This allows the company owners to limit their liability because of the many risks associated with running a real estate business, including lawsuits arising from construction accidents, issues with tenants and depreciation in the value of the property. Business insurance provides some protection, but many real estate companies want more protection because of these risks.

LLCs—or limited liability companies—are most popular for people who have privacy concerns and would rather their real estate purchases weren't public information. Credit: Clay Banks/Unsplash

The LLC, not its members, owns and manages the business and the real estate. LLCs provide a great deal of flexibility in how a company is managed and how the profits are split among the co-owners.

Should I buy a property using an LLC?

For people with privacy concerns, LLCs can also be used to acquire real estate. All property transfers are recorded and available to anyone who wants to look up information on an address. Listing the owner as an LLC prevents the buyer’s name from entering the public record. This option is particularly attractive for celebrities and other high-profile and high-net-worth individuals, and is used often as a result.

However, a new federal law known as the Corporate Transparency Act will require domestic and foreign LLCs doing business in the U.S. to disclose “who is the real, natural person (a.k.a. beneficial owner) who owns and controls an entity at the point of formation,” as well as update the information if the company changes ownership. The information will be stored in a federal database accessible to banks and law enforcement agencies but not available to the general public. The law is part of the $740 billion National Defense Authorization Act that was voted into law by Congress on Jan. 1, 2021.

Real estate investors commonly use LLCs to buy property they intend to rent to tenants because of the additional liability protections offered by the structure. Such investors can also use the LLC to pay property taxes and funnel other costs associated with property ownership through the LLC.

Like LLCs, corporations also provide liability protection for owners, but in general corporations are more complicated to form, operate and manage than an LLC.

Further, corporations may not provide as many tax benefits. An LLC is considered a pass-through entity, meaning that its profits “pass through” directly to its members without being taxed on the company level by the government. Instead, members list the profits, or losses, on their individual federal income tax returns.

Corporations, in contrast, face two layers of taxes. The business pays taxes on earnings at the corporate level, and then the earnings are taxed again when distributed as dividends or incomes to the owners or shareholders. Further, corporations pay a corporate tax when property is transferred into the corporation. The taxable amount is the difference between the value of the property when it was originally purchased and its value when transferred to the corporation. There are no tax consequences when property is transferred into an LLC.

While they have many attractive features, LLCs do have some disadvantages. In many states, if a member leaves the company, dies or goes bankrupt, the LLC has to be dissolved. Corporations, on the other hand, exist in perpetuity. 

How do I start an LLC?

To start an LLC, individuals need to create a unique name in the state where they plan to do business. Most states have online lists of existing LLC names. The LLC also needs to designate a registered agent to receive all official correspondence, and it will need a nine-digit employer identification number (EIN) for tax purposes. To keep personal and business affairs separate, it is also a good idea to create a separate checking account for the LLC.