Final answer:
A Limited Liability Company (LLC) is an entity that offers the legal protections of a corporation with the tax benefits of a partnership. It provides limited liability to owners and is flexible in management, taxation, and the ability to raise capital.
Step-by-step explanation:
An entity that can elect to be treated as a partnership for tax purposes and a corporation for legal purposes (limited liability) is known as a Limited Liability Company (LLC). This business structure allows a company to benefit from the corporate advantage of limited liability, where the owners and shareholders are protected from personal liability for the company's debts and liabilities. At the same time, it can elect to be taxed as a partnership, with profits or losses passing through to individual partners, avoiding the double taxation commonly associated with corporate tax structures.
The main strength of the LLC is that it combines the limited liability feature of a corporation, where individual owners are not responsible for the company's debts and liabilities, with the tax advantages of a partnership, where business income is only taxed once on the owners' personal tax returns. Members of an LLC are called partners or members, and they share in the profits and losses of the business.
The LLC is attractive to business owners for several reasons. It is subject to little government regulation, can raise more capital than a sole proprietorship, and provides flexibility in management and business operations. The LLC structure is often used by startups, small to medium-sized businesses, and even larger entities looking to maximize legal protections while maintaining a flexible tax status.