While small business owners have a variety of options when it comes to choosing a form of corporate existence for a new enterprise, the limited liability company, or LLC, has become one of the most popular. Simplicity in creation and operation, flexibility in tax treatment and the provision of limited liability have made it an ideal choice for many small businesses.
Flexibility in Tax Treatment
An LLC can designate whether to be taxed as a sole proprietorship, a partnership or a corporation by filing the appropriate election forms with the IRS. Although many business owners choose LLC formation at least in part because of the opportunity to receive pass-through taxation, avoiding the double-taxation problems of Subchapter C corporations, differences in tax brackets for personal and corporate returns may make it more appropriate to file as a double-taxed corporation rather than a Subchapter S corporation, partnership or sole proprietorship. The flexibility inherent in the LLC form positions the company to tailor its tax status to its needs in any given year.
Flexibility in Documentation and Operation
Corporations require a charter, bylaws and shareholder agreements. They must appoint a board of directors to make important decisions for the company, and keep minutes of board and annual shareholder meetings. This generally involves a great deal of recurring paperwork that not only increases operating costs, but also increases the opportunity for mistakes that can result in the loss of limited liability status. The documents required to create and operate an LLC, by contrast, are relatively simple. While LLC requirements vary from state to state, many states have made free forms available online to help entrepreneurs set up their company.
While the requirements for an LLC are simpler than those for corporations, an LLC offers the same level of limited liability in the event of a lawsuit against the company, employees or other members. This enables members to start small but later expand into new lines of business and hire additional employees without risking their personal assets if an employee commits an act resulting in a lawsuit. Members, however, remain liable for their own acts, even if they commit those acts in the course of company business. As such, the limited liability shield will not protect them from their own individual torts, such as fraud.
Choosing a corporate form can lend a certain level of market credibility to the enterprise that may be lacking in a sole proprietorship. Conducting business under an LLC can make clients and customers feel like they are dealing with a higher level of professionalism and competency; even if this difference is only psychological, the advantage can be valuable. Additionally, as a separate legal entity, an LLC has the ability to own property. As such, members who title land and vehicles to the business may in some circumstances be able to shield those assets from the claims of personal creditors.