According to the IRS, a limited liability company (LLC), “is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation. Visit LLC Legal Services to get started.
A key feature of an LLC is a flexible business type blending ingredients from a partnership and corporation into an entity where the owners are called members, and can be unlimited in number and scope.
What are the benefits of running an LLC?
Because of its unique structure, a limited liability company offers several advantages over other business types, among them:
- Pass-through taxation, where profits are taxed at the member level rather than the LLC – meaning no double taxes, this is a similarity LLCs have with a partnership. Note: This does not apply under the statutes of the District of Columbia.
- LLCs are very flexible in their taxation. An LLC is able to file as a different business entity, such as an S corporation or sole proprietorship, so long as it would otherwise qualify for that business structure. Note: If filing as a C corporation, double taxation can occur on business profits.
- The members; i.e., owners, are protected from liability for acts or debts of the company, for small business owners considering a sole proprietorship, this is a major selling point of an LLC.
- The structure provides for a flexible management structure and less paperwork.
- An LLC is not under threat of a boardroom takeover.
- The business can be set up with just one member, or owner.
What are the hazards of LLCs?
As a practical piece of advice, do not take the name “limited liability company” for granted and assume it is easier to run this sort of business than any other. Here are some things to consider:
- Raising capital may be a problem. Investors are often more comfortable within the confines of the better understood “corporate” world.
- The management structure is different. You do not need a board of directors.
- LLC statutes vary from state to state. How you do business in your home state could be vastly different – and more confusing – than in another.
- Some states (Alabama, California, Kentucky, New York, Pennsylvania, Tennessee, and Texas) levy a franchise tax, above and beyond other taxes you are required to pay.
- The members, as owners, use different titles (member, managing member, partner, chief executive officer), which can make it difficult for other businesses to decide who they will enter into a contract with on the LLC’s behalf.
Should I go it alone?
Unlike other legal business entities, a limited liability company offers a simple advantage for many new, small business owners: If you want to start small, really small – with just yourself as the sole proprietor – then you can. Creating an LLC, as opposed to a sole proprietorship, allows your business and your personal assets to be separated, affording you more protection from any debt or costs associated with your company. You truly can be your own business, contracting or sub-contracting out other tasks or projects as necessary, with a limited liability company.