Why Choose an LLC?

by David Carnes
The LLC form suits the needs of many small businesses.

The LLC form suits the needs of many small businesses.

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The LLC is a form of business organization that combines elements of corporations and partnerships. It is designed to provide the advantages of limited liability, favorable taxation, flexible ownership structure and reduced legal formalities. LLCs are created by state law, and these laws differ somewhat from state to state.

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Limited Liability

Unlike partners or sole proprietors, owners of shares in LLCs, known as members, are liable for the debts of the LLC only up to the amount that they contributed to it. In general, the personal assets of members cannot be reached by the LLC's creditors, although there are exceptions in certain cases of misconduct.

Flexible Taxation

LLCs are considered "pass-through" taxation entities by the IRS, meaning that the IRS taxes the members of the LLC rather than the LLC itself. Pass-through taxation avoids the double taxation of dividends that many corporations face. One-member LLCs are disregarded by the IRS, and LLC income is attributed to the member as his individual income. Other LLCs are treated as partnerships, and LLC income is allocated to members in proportion to their right to receive profits from the LLC. LLCs can choose to be treated as either C corporations or S corporations for tax purposes, and there are certain circumstances when LLC members can lower their overall tax burden by doing so. Certain preconditions apply to S corporation tax treatment.

Flexible Ownership Structure

An LLC can have only one or many members. The members are free to allocate entitlement to profits and losses in a proportion that is different from the members' relative capital contributions, and the IRS recognizes this arrangement for tax purposes. Unlike S corporations, LLCs can be owned by either corporations or individuals. LLC shares can be assigned to non-members, and profit allocations can be separated from voting rights and assigned.

Informality

LLCs can be formed quickly and easily -- all that is usually required is the filing of Articles of Organization, containing only basic information, with the secretary of state of the state in which the LLC is to be formed, along with a filing fee. LLCs are not required to create operating agreements, although operating agreements are useful as they can provide standards for resolving disputes among members. LLCs are not required to appoint boards of directors or keep minutes of meetings. They are not required to hold shareholders' meetings in many states. They can be managed by the members themselves, by non-members, or by a combination of both. In general, LLCs require considerably less paperwork and record-keeping than corporations do.