The relationship of the members is governed primarily by the operating agreement that the members make with each other, again resembling both general and limited partnerships. Its organization may be more formal or less formal, depending upon the form of limited liability company that its promoters choose. On the issue of limited liability, however, it takes on the characteristics of a corporation. Every member of a limited liability company has limited liability. The major driving force in the law of business organizations in the United States is federal tax law.
Shareholders also pay tax on the dividends they are paid.
Partnerships, on the other hand, pay no tax on their income. Partners pay tax on their distributions from the partnership. A partnership is often called a pass through organization for that reason. The development of the law of business organizations is the development of organizations that offer the large benefit of limited liability to its members coupled with the pass through tax status of partnerships. The limited liability company has become popular because the Internal Revenue Service has given partnership status to certain limited liability companies, thereby offering in some instances the major advantage of the corporation with a major advantage of a partnership.