Advantages & Disadvantages of an LLC

by Harper Jones

An LLC, or limited liability company, is a business structure that is regulated by state law, and each state has some variation as to how it governs these entities. The limited liability company is a relatively new business model and, like any business structure, there are advantages and disadvantages to using the LLC structure to govern a business.

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Taxes, Debts and Profits

An LLC is its own legal entity. Therefore, members of an LLC -- regardless of which state it's in -- have limited liability for the debts of their company and in most cases cannot be held personally liable for the LLC's debts. In addition, because the IRS does not tax LLCs, instead of paying both corporate and individual taxes on LLC earnings, members of an LLC claim the LLC's earnings only on their individual tax returns, thus avoiding the "double taxation" that corporations usually face.

Investors

LLCs are regulated by state statutes, but optional operating agreements can also dictate how an LLC is run. An operating agreement is a document created by LLC members that states how and by whom an LLC is run. Only a few states, including New York, require LLCs to create operating agreements as of November 2010. If an operating agreement is not created, an LLC may be regulated by default state laws, so it's usually advantageous for LLC members to have an operating agreement to avoid any potential problems. Many investors are also still hesitant to invest in LLCs since they can be so heavily regulated by state laws, and the business structure is still not as well understood as a corporation or partnership, according to Gaebler.com.

Paperwork

To start an LLC, you must file an Articles of Organization. Articles of Organization forms are generally available from the secretary of state of the state in which the LLC wishes to organize. The Articles of Organization are usually only one page where you state the LLC's name, address, purpose, registered agent, proposed duration of time the business will last and, sometimes, the members of the organization. A registered agent is needed to accept mail and process of service on behalf of the LLC, and need not be a member of the business. In general, it takes much less paperwork to start an LLC than a corporation or partnership.

Transfer of Interest and Dissolution

Members of an LLC cannot transfer their interest in ownership without the approval of the other members. The LLC usually dissolves if a member dies or is no longer interested in being a member of the LLC, whereas a corporation or partnership is much harder to dissolve. For this reason, many LLCs dissolve quickly and without much notice.