Advantages of a Limited Liability Company LLC

A limited liability company, or a limited corporation, is a type of business entity.  The LLC structure is a hybrid between a corporation and a partnership which combines the most advantageous aspects of each.  Although the LLC definition implies that the business owners are protected from liability, that is not really the case.  A limited liability company structure only insulates the LLC's members if they can demonstrate that they acted in the best interests of the LLC.     

Limited liability company law varies from state to state and limited liability forming must be done in accordance with the laws of the state in which the LLC will be registered.  To determine the limited liability company law  in your state, you should consult with an experienced business attorney.

LLC Advantages

Limited liability companies can offer a number of advantages to business owners depending upon their circumstances and financial goals. 

These LLC advantages include:

• Taxation Flexibility – An LLC can elect how it wants to be treated for tax purposes (S corporation, C corporation, sole proprietorship, or partnership),  as long as it would ordinarily qualify for such treatment, which may help prevent a state tax penalty;
• Limited Liability for Members - The members of the business are protected from liability for certain acts of the LLC as well as from repaying debts of the LLC;
• Relaxed Record Keeping – Limited liability companies are not required to keep as many records as corporations;
• Pass Through Taxation – Profits and Losses pass through to members, so there is no double taxation;
• No Self-Employment Tax – The bottom line profit of an LLC is not subject to self-employment tax whereas the bottom line profit of a corporation is;
• Enjoyment of Tax-favored Fringe Benefits – Members do not receive a salary; they are paid via distributions of profit or guaranteed payments.  Guaranteed payments represent earned income and are treated as tax-favored fringe benefits.

Disadvantages of Forming an LLC

Limited liability forming can present a number of disadvantages as well. 

Some disadvantages may include:

• Difficulty Raising Business Capital;
• Additional taxes levied under revenue laws in some states; and
• State renewal fees may be higher than they are for corporation in some states.

Who Should Form An LLC?

Anyone concerned with maximizing asset protection while simultaneously minimizing tax liability should consider forming an LLC.  Asset protection is of particular concern if you operate a business where risk is high and your insurance coverage may not be sufficient to cover a claim, thus exposing your personal assets to seizure by plaintiffs and judgment creditors.  However, some states prohibit professionals, such as doctors and accountants, from forming LLC's.  Additionally, certain types of businesses, such as banks and insurance companies, may not utilize an LLC structure.