A limited liability company (LLC) combines the corporation's protection from personal liability for business debts and the pass-through tax structure of a partnership or sole proprietorship; while setting up an LLC is more difficult than creating a partnership or sole proprietorship, running one is significantly easier than running a corporation.

One of the main features of an LLC is Limited Personal Liability. Like shareholders of a corporation, all LLC owners are protected from personal liability for business debts and claims. This means that if the business itself cannot pay a creditor, the creditor cannot legally come after any LLC member's house, car, or other personal possessions. Because only LLC assets are used to pay off business debts, LLC owners stand to lose only the money that they have invested in the LLC.

However, similar to corporations, there are some exceptions to limited liability. LLC owners can be held personally liable if they:

This last exception is the most important, because if owners do not treat the LLC as a separate business, a court might say that the LLC does not really exist and find that its owners are really doing business as individuals, who are personally liable for their acts. To prevent this from happening, owners and co-owners must:

 A good liability insurance policy can shield your personal assets when limited liability protection does not. Insurance can also protect your personal assets in the event that your limited liability status is ignored by a court. Furthermore, insurance can protect your corporate assets from lawsuits and claims. But your LLC will not be protected if it fails to pay its bills: commercial insurance usually does not protect personal or corporate assets from unpaid business debts, whether or not they are personally guaranteed.

Unlike a corporation, an LLC is not considered separate from its owners for tax purposes. Instead, like a partnership or sole proprietorship, it is what the IRS calls a "pass-through entity.” This means that business income passes through the business to the LLC members, who report their share of profits or losses on their individual income tax returns. Each LLC member must make quarterly estimated tax payments to the IRS.

While an LLC itself does not pay taxes, co-owned LLCs must file Form 1065, an informational return, with the IRS each year. This form, the same one that a partnership files, sets out each LLC member's share of the LLC's profits, which the IRS reviews to make sure LLC members are correctly reporting their income.

Finally, the owners of most small LLCs participate equally in the management of their business. This arrangement is called "member management."  There is an alternative management structure called “manager management,” in which you designate one or more owners (or even an outsider) to take responsibility for managing the LLC.  The nonmanaging share in LLC profits. In a manager-managed LLC, only the named managers get to vote on management decisions and act as agents of the LLC. Choosing manager management sometimes makes sense, but it might require you to deal with state and federal laws regulating the sale of securities.