Limited liability companies (LLCs) offer several benefits because they share characteristics with several types of business entities. LLCs have similar characteristics to partnerships, corporations and sole proprietorships. Because of these shared characteristics, LLCs offer flexibility on a number of issues important to business owners. While state laws vary for LLCs, the same principal benefits typically apply from state to state.
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LLCs offer flexibility in the area of taxation. The federal government does not have a specific classification for LLCs within the Tax Code. The reason is because LLCs are a creation of state laws. Accordingly, the IRS does not have a specific tax regime set up for LLCs. Therefore, LLCs can elect to be taxed as a corporation or as a sole proprietorship or partnership. A major benefit to forming an LLC is the ability to have the business taxed as a sole proprietorship or partnership, which allows the business to only get taxed once. Corporate owners and shareholders, on the other hand, pay taxes on any revenue they receive from the corporation and the corporation itself pays taxes.
LLCs provide members with options for management. Corporations have shareholders, officers, or board members, and directors, or managers. Most state LLC statutes provide flexibility in the management of an LLC. State laws typically recommend that LLCs have operating agreements that set some rules and procedures for the LLC operations, but operating agreements are not mandatory in most states. In addition, LLC members can manage the LLC or appoint different people as managers. This gives LLC members options on how involved they want to be in the LLC’s day-to-day operations.
LLCs allow business owners flexibility in a number of areas. While LLC members ordinarily get taxed like a sole proprietorship, they could elect to be taxed like a corporation. This gives them flexibility when it comes to taxation. Corporations must adhere to rigid corporate formalities set forth in substantive state law. This involves creating by-laws, keeping minutes for meetings and having formal votes on most issues. State laws typically have no similar requirements for LLCs, which gives LLCs flexibility in operating the company.
LLCs enjoy much of the flexibility that unincorporated businesses, like sole proprietorships and partnerships, offer. However, another major benefit to LLC formation is that LLCs, at the same time, provide liability protections that corporations offer. LLCs are usually separate legal entities. Therefore, members are not liable for the debts or liabilities of the LLC. If an LLC gets sued, the plaintiff cannot usually get relief from the members’ personal assets. Also, members cannot be held liable for negligent acts of other members. These protections, however, are not unconditional. In instances of fraud and abuse, courts may hold members personally liable. In addition, many states prohibit professional service businesses, like law firms, accounting firms and doctors, from limiting their personal liability for professional malpractice. This is an area of legal ambiguity at present, and when members can be held liable varies according to state.