Forming a limited liability company (LLC) can offer a number of benefits over other business structures. The owners of an LLC typically have better liability protection than is offered by sole proprietorships or partnerships. In this way, some of the advantages of an LLC are similar to those offered by a corporation. Other advantages of an LLC include flexible ownership and profit distribution, different taxation structures, and less administrative paperwork. There are also potential disadvantages, such as extra complexity when compared to sole proprietorships and partnerships, so an LLC is not always the best choice for every business.
Limited liability companies are business entities in the United States that are allowed by state statute, rather than federal law. Similar business structures exist in other countries around the world, but the specifics can vary. In some cases, an LLC can have the same longevity benefit of a corporation in that it can survive the death or bankruptcy of a member, though in other areas these types of events can dissolve the business.
The main advantages of an LLC are usually seen as the increased protections offered to the owners. These owners are typically referred to as members, and they may be individuals, other LLCs, or even corporations. An LLC is typically treated as a separate entity, similar to a corporation, in many circumstances. This includes matters of liability, since individual LLC members typically cannot be held financially responsible for any debts that the business incurs or any lawsuits that are brought. The most notable exception to this is fraud, in which case LLC members are often held accountable.
Other advantages of an LLC typically include the great deal of flexibility allowed by the business structure. Unlike most common partnerships, members of an LLC are usually able to split the ownership in any way that they want. Profits can be distributed in any way as well, and can often be taxed as personal income of the members. This allows an LLC to avoid double taxation, since profits are not taxed separately as business income and as salaries. It is also possible to have LLC income taxed as if it were a sole proprietorship, partnership, corporation, or even an s corporation.
When compared to a corporation, the main advantages of an LLC involve lower amounts of paperwork, administration, and record keeping. Corporations typically require that regular meetings be held along with a detailed record of minutes. The LLC business structure does not often require these kinds of regimented meetings or record keeping.