Which statement about LLCs is correct?

• A. Members have personal liability for LLC debts.
• B. LLCs are taxed as corporations by default.
• C. Members have limited liability, and the LLC is not treated as a separate taxable entity, with partnership-style tax benefits if chosen.
• D. LLCs must be taxed as sole proprietorships.

Answer: (C)

The concept being tested is that an LLC combines protection from personal liability with flexible tax treatment. Members have limited liability, meaning their personal assets aren’t at risk for the LLC’s debts (unlike general partners in a partnership). Tax-wise, the default approach is pass-through taxation: the LLC itself isn’t taxed as a separate entity, and profits or losses flow through to the members’ personal returns. A single-member LLC is typically treated as a disregarded entity for tax purposes, effectively like a sole proprietorship, while a multi-member LLC is treated like a partnership for tax purposes. The LLC can elect to be taxed as a corporation if that option is advantageous. So the statement that matches this mix—limited liability with pass-through tax treatment by default and the option for partnership-style tax treatment if chosen—is the best description.