Limited Liability Company
The LLC - or Limited Liability Company - is the newest form of business incorporation, and is often described as a combination of a corporation and a partnership. It combines the credibility and limited liability of corporations, with the ease of management of a partnership or sole proprietorship. Owners of an LLC are called members.
Advantages of Forming an LLC
- Limited Personal Liability - Members of an LLC have very limited liability for the debts, obligations and actions of their company, meaning they can only be held to them if they have signed a personal guarantee.
- Pass Through Taxation - Although LLCs exist as separate entities, their earnings are not taxed at a corporate level. Any income or loss is reported on members' personal tax returns. This helps them avoid the issue of double taxation faced by C corporations, which have earnings taxed both at the corporate level and on the personal tax returns of their owners.
- Ownership Flexibility - Forming an LLC gives the parties involved a flexible ownership structure that doesn't set limitations on who can be involved. The company can have any number of members, which can include individuals, corporations, foreign entities or even other LLCs.
- Disproportionate Profit Distribution - LLCs also allow members to be flexible in how they split up the company's earnings. This means that profits and losses do not need to be given out according to how much of the company each member owns.
- Relaxed Reporting Requirements - Starting an LLC allows members to avoid many of the corporate formalities of other business entities. While LLCs do have some reporting requirements, they have less annual paperwork and aren't required to keep minutes or hold annual meetings.
Disadvantages of Forming an LLC
- Unattractive to Outside Investors - While LLCs are an attractive format for many types of small businesses, they are not designed for companies that expect to grow significantly or work with venture capital investors. LLCs that do decide they want to pursue outside investment may want to convert their businesses into C corporations.
- Differing Treatment Across State Lines- Because many states have different regulations surrounding LLCs, companies that operate in multiple states may not get consistent treatment.
- Limited Life - The existence of LLCs is not necessarily perpetual, and some state laws require that they be dissolved after a specific length of time (generally 30 to 40 years). The company technically dissolves when one of its members leaves.
- Unavailable for Some Businesses - Certain types of businesses, such as banks and insurance companies, are not allowed to form LLCs.
- Limited Personal Liability
- Pass-Through Taxation
- Flexible Management and Ownership Structure
- Less Formalities and Paperwork
- Existence is not necessarily perpetual
- Newer Type of Business Entity