Learn advantages and disadvantages of a Limited Liability Corporation, and compares an LLC to a corporation or a partnership
Until recently, business owners had only three choices to consider when selecting the legal structure of their business: sole proprietorship, partnership, or corporation. Now Americans have a fourth option, the Limited Liability Corporation, or LLC.
A Limited Liability Corporation is unique in that its legal structure is a hybrid-a cross between a partnership and a corporation. It offers many of the advantages of both structures, but as with the other three types of business structures, there are some disadvantages.
Owners, or members, as they are called, of a LLC enjoy the same liability protection of a corporation. They cannot be held personally responsible for debts. The only exception to this is in cases where the members have signed a personal guarantee.
A LLC offers tax advantages similar to that of a corporation but unlike a corporation, is not limited in the number and types of shareholders, or in the distribution of profits. An S corporation is limited in these areas, and also cannot own more than 80% of the stock of another corporation. A LLC is not bound by these limitations. The business structure of a LLC is less complex than that of a corporation. It does not require the keeping of formal minutes or resolutions. All business expenses, profits and losses flow through the company directly to individual members, thus avoiding double taxation of corporate and individual taxes.
LLC’s also have an important advantage over conventional partnerships in that all members can participate in management decisions without the risk of losing liability protection. In a partnership, there are limits as to who can take part in management in order to preserve liability protection.
With all of its advantages, there are some drawbacks to structuring a business as a Limited Liability Corporation. A LLC is disbanded when a member undergoes bankruptcy or dies, unlike a corporation, which can last forever. While a LLC generally provides a tax advantage over a corporation, there are some situations that can favor a corporate tax structure. While less complicated than a corporation, a LLC is more complex and involves more paperwork than a partnership or sole proprietorship. Also, if a business owner thinks that they may eventually take their company public, or issue shares to employees in the future, then they should probably consider structuring their business as a corporation.
A LLC can be formed in all 50 states, with each state having its own rules governing the formation. The formation of a LLC generally requires two main steps-filing articles of organization with the Secretary of the State and paying required fees, and drafting an operating agreement.
As with the other three types of business structure, each business owner or potential owner should carefully weigh the advantages and disadvantages of a LLC and look at their individual circumstances before choosing a legal structure for their business. However, for many start-ups, a Limited Liability Corporation is worthy of consideration as a viable option that provides many of the benefits and protections of a corporation without losing the flexibility of a sole proprietorship or partnership.