Why Form an LLC

by Eric Novinson

An LLC, or a Limited Liability Company, has some advantages over other business structures such as partnerships or corporations. A standard partnership provides the flexibility of an LLC, but also makes each partner liable for all of the debts of the partnership. A corporation protects its owners from liability for the debts of the business, but the owners must keep many records and follow many additional rules.

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Cost and Record Keeping

A business that decides to register as a corporation can either register as an S-corporation or a C-corporation. Although there are fewer requirements to register as an S-corporation than there are for a C-corporation, creating an S-corporation is still more time consuming and expensive than setting up an LLC. According to the California Franchise Tax Board, a corporation must hold annual stockholder meetings and keep records of the minutes from these meetings, a requirement that does not apply to an LLC.

Profit Distribution

Profit sharing requirements that apply to a corporation do not apply to an LLC, according to the Small Business Administration. The owners of an LLC can jointly decide how much income to allocate to each owner without regard to the percentage of ownership each member has in the company. Corporations have a more formal income allocation process that depends on the number of shares each owner holds in the corporation, and cannot decide to assign extra income to an owner who performs a greater share of the work.

Limited Liability Partnership

A limited liability company holds advantages over a limited liability partnership. In a limited liability partnership, some members are limited partners and others are general partners. Each general partner is still fully responsible for all of the organization's debts, including any judgments from lawsuits. The limited partners receive limited liability protections, but they cannot make operational decisions for the organization, according to the Foley & Lardner law firm. In an LLC, all owners can make operational decisions, and all owners still have limited liability.

Corporate Ownership

An S-corporation is an alternative to an LLC because it is also a pass-through business structure, meaning it does not pay corporate income taxes, unlike a C-corporation. An S-corporation is restricted to 100 shareholders as of 2010, according to the Congressional Budget Office. There is no limit on the number of owners for an LLC. Partnerships and other corporations may not own shares of an S-corporation, but they can share ownership of an LLC.