National Occupational Competency Testing Institute (NOCTI) Business Practice Exam

What is a defining feature of a limited liability company?

1. Only one person can manage it

2. Formed through a special written agreement

3. It has unlimited liability

4. It is always a nonprofit

The correct answer is: Formed through a special written agreement

A defining feature of a limited liability company (LLC) is that it is formed through a special written agreement, typically known as an operating agreement. This document outlines the structure and operating procedures of the LLC, as well as the rights and responsibilities of its members. The operating agreement is crucial as it helps protect the members' limited liability status while defining how the business will operate, manage profits and losses, and handle various business matters. In contrast, the other options do not accurately represent the characteristics of an LLC. For example, LLCs can have multiple members, allowing more than one person to manage the company, which contradicts the implication that only one person can manage it. Additionally, limited liability entails that the liability of the members is limited to their investment in the business, meaning they do not have unlimited liability. Lastly, LLCs can be established for profit and are not always considered nonprofit organizations, as they can engage in various business activities aimed at generating profit.