LLC
Factual definition
A limited liability company is a U.S. state-law legal entity whose members generally have limited liability, subject to applicable exceptions. Federal income-tax classification is separate and depends on ownership, default rules and elections.
Also called Limited liability company
Review an acquisition LLC’s tax and ownership terms
Hypothetical: an acquisition vehicle is formed as an LLC. Its federal income-tax treatment may be disregarded-entity, partnership or corporate treatment under the relevant rules and elections.
Reinvesting 20% of sale proceeds does not by itself establish 20% ownership or tax deferral; valuation, capitalization and transaction terms matter.
Separate the entity from its tax classification
Hypothetical U.S. federal income-tax examples. Assume an ordinary domestic LLC, no corporate tax election and no special classification rule.
With one individual owner, the default is disregarded-entity treatment. With two unrelated individual owners, the default is partnership treatment.
The IRS explains these default rules and the available elections.
Both businesses can still be LLCs under state law. The tax classification does not tell you which member can approve a sale, whether a lender has a personal guarantee, or how sale proceeds would be divided.
Those questions require the relevant agreements and ownership records.
For an acquisition, request the entity’s formation and governing documents alongside its tax returns and election records. A description such as “an LLC taxed as a corporation” may be accurate; treating the two labels as incompatible could send the review down the wrong path.
A rollover percentage is not automatically an ownership percentage
Hypothetical acquisition vehicle: the sponsor contributes US$8m and the seller contributes US$2m of agreed rollover value. Assume both receive the same class of units at the same price, with no other equity, options or preferences.
The seller then owns 20% of the US$10m equity capitalization. A statement that the seller rolled 20% of sale proceeds would not establish this result without knowing the sponsor’s contribution and the unit terms.
If distributable proceeds are US$15m and the agreement requires a simple pro-rata division under these assumptions, the seller receives US$3m. Different preference, incentive or distribution terms could change that amount even if the headline ownership remains 20%.
Keep the capitalization calculation, distribution provisions and tax analysis separate. This example establishes ownership arithmetic, not tax deferral or a particular federal classification.
Where LLC fits
Explore this term in the glossary cloud →