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When deciding to form a business, there are a number of issues that must be resolved before formation. Primary among those issues is what legal form the business will take. Among the options are a sole proprietorship, a partnership, a corporation, or a limited liability corporation, or LLC. Each entity has advantages and disadvantages. Among the advantages of an LLC formation are pass-through taxes, avoidance of personal liability, and retention of management control for the owners.
An LLC essentially combines benefits of both a partnership and a corporation into one legal entity. LLC formation is relatively simple, in most cases. Within the United States, state law will determine the requirements for an LLC formation. In most cases, a LLC may have as many members as desired, although there may be certain entities that may not form a LLC, such as insurance companies.
One benefit to LLC formation is that the business is not taxed twice as in the case of a corporation. A corporation is taxed at the corporate level, if the corporation shows a profit, and then again at the personal level because the shareholders must also pay taxes on any dividends they receive. With an LLC, the profits or losses of the business "pass through" to the shareholders, much like a partnership, and are not taxed at the corporate level. Although an LLC must file an information return with the Internal Revenue Service in the United States, the form essentially just serves to inform the IRS who the members of the LLC are, and what profits they received for the year.
Another benefit to an LLC formation is that the members of an LLC avoid personal liability much like a corporation. Personal liability can bankrupt a business owner, which is one advantage to forming a corporation. An LLC allows the members the same avoidance of personal liability that a corporation has, without the tax burdens of a corporation. Under an LLC formation, the members are shielded from legal liability in most cases for wrongdoings or tortious conduct.
LLC formation also allows the members to retain more control over the business than a traditional corporation allows. Under the rules of a traditional corporation formation, a board of directors has a considerable amount of control over the business. An LLC, on the other hand, is generally run by a managing member allowing more control over decisions affecting the business.