Choosing a business structure is one of the most important decisions you’ll need to make when setting up your business. For many people the limited liability company (LLC) is their first choice. An LLC is a type of unincorporated association allowed by state law, controlled by its shareholders, or members.
One of the main benefits of an LLC is that while offering some of the limited liability of a corporation, it also offers the flexibility of a sole proprietorship or partnership.
Here are some benefits of forming an LLC:
An LLC provides its members with limited liability protection. The owners will not be held liable for any of the business’ debts and acts of the LLC. Although this is not the same protection afforded by a corporation, it will in most cases, protect the owner’s personal assets from lawsuits and business debt, but will not protect in cases of fraud.
The Internal Revenue Service treats an LLC as a pass-through entity. This means that the profits will be taxed based on a number of factors. If there is only one member the profits would be filed on an individual tax return. For more than one partner it would be treated as a partnership. An LLC can also choose to be taxed as a corporation, which would allow it to be taxed as a C or S Corporation.
In most states an LLC can be set up by one person. An LLC does not need a board of directors nor any of the annual meetings, recorded minutes, required paperwork and recordkeeping required of a corporation. An LLCs existence generally is not tied to its members. However in some states membership cannot be transferred, assigned or sold. In these states, the LLC is not considered a separate entity. It’s best to check your states laws to determine what the rules are regarding membership.
The owners of an LLC do not have to divide all profits evenly amongst members. This flexibility allows the owners to choose how the profits will be distributed among its members. This is different from a partnership where profits are split evenly between partners.
While an LLC is perfect for many small business owners, there are some restrictions. In most states you cannot form an LLC if you operate certain financial service businesses, and in California certain professions cannot form LLCs. That’s why it’s important to check your local laws, consult an attorney and accountant if necessary and make an informed decision.