Limited Liability Companies (LLC’s) have been, and will probably continue to be, one of the most popular choices of entities used by small businesses. They are flexible, affordable to set up, and have fewer requirements and formalities than some other entity types. They also offer numerous advantages. LLC’s are something of a hybrid, originally developed to offer an alternative to the traditional options of a sole proprietorship, partnership, and corporation. Something of a middle ground that doesn’t require all the formalities of a corporation, but would still provide owners with the limited personal liability that sole proprietorships and partnerships do not.
Let’s run through the top advantages to an LLC, obviously, depending on specific circumstances, some of these may be more advantageous than others, but in general, these are four of the big advantages offered by LLC’s.
Limited Personal Liability
It says it up front in the name: Limited Liability. LLC’s provide the owner with personal asset protection; sole proprietorship and partnerships don't offer that advantage. In a partnership or sole proprietorship, the debts and obligations of the business are also the debts and obligations of the owner; from a legal standpoint the owner and the business are the same “person.” Not so with an LLC, the owners are separate from the business, and the company is responsible for its own debts and obligations. That means, under most circumstances, the personal bank accounts, property, and assets of the individual owners aren’t at risk for what the company does and can’t be used to collect the company debts.
Tax Advantages
Basically, all the options are open to LLC’s when it comes to tax classification. An LLC can opt to be taxed as a sole proprietorship, partnership, S-corporation, or C-corporation. Owners should take a look at their individual situation and then determine what the best tax structure for them would be. By default the IRS will classify an LLC as either a sole proprietorship (if it’s a single-member LLC with one owner) or a partnership (if it’s a multi-member LLC with more than one owner) and will get “pass-through” taxation, meaning the company itself doesn't pay any taxes and owners can avoid the concern of double taxation that comes up with C-corporations. S-corporations can take advantage of avoiding the double taxation issues as well, but companies must meet certain requirements in order to qualify for S-corporation status. In most cases, it’s a best of all worlds situation since the owners of an LLC can pick the tax structure that is most beneficial to them.
Fewer Formalities and Paperwork
When it comes to registered business entities, LLC’s have fewer corporate formalities, paperwork, and administrative headaches (this doesn’t include sole proprietorships and partnerships, which are unregistered business entities, but from a limited liability standpoint probably not the ideal type of business entity for owners). In most states, LLC’s are formed by registering with the appropriate state office, typically the secretary of state or similar group and they have minimal requirements in terms of how they are operated, whether or not they need annual meetings and what type of annual reports are required to file with the state in order to maintain good standing. Corporations on the other hand can have a wide range of formalities, reports, and filings that are necessary in order to maintain good standing. Please be aware, however, that just because a state may not require an LLC to maintain certain formalities or requirements, that doesn’t mean they should be ignored or go unaddressed, there may still be some things that should be addressed in an operating agreement or some company resolutions in order to maintain the limited liability of the owners.
Management Flexibility
LLC’s can be managed by members (the owners of the company) or managers, who can be members or not and are appointed by the members to run the day-to-day operation of the business. This means owners can be more hands-off or hands on depending on how the LLC sets itself up. There is also the flexibility to appoint officers, c-level executives, and similar positions normally found, or required, in corporations or keep a less formal approach and structure as the company starts out and grows.
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