Using a limited liability company, or LLC, structure for your business may provide you with benefits not available with other entity forms. However, consider all business forms before choosing to create an LLC. The level of benefit an entity can provide directly relates to the type of business venture and the attributes you deem most important.
One of the most important benefits of an LLC structure is that members are generally not personally liable for the activities of the LLC. Any debt or obligation arising from contract, lawsuits and other sources remains the sole liability of the business. There is no requirement that you must make additional contributions to make the LLC solvent in the event the LLC has insufficient funds or assets to meet obligations; however, the assets in the LLC remain vulnerable to creditors.
Membership interests in an LLC are not transferable. The lack of transferability ensures a level of consistency in the members who manage the business. However, you can transfer your financial interest in the LLC. This provides the transferee with a right to financial distributions from the LLC, but does not transfer the right to participate in management activities.
Membership of an LLC provides you with equal management authority as all other members. In contrast, a corporation is able to limit the level of shareholder participation by creating different classes of stock. However, the LLC can impose limitations on your active participation in the business if the operating agreement provides that the LLC is to be run by non-member managers. The operating agreement is subject to amendments only if the members unanimously agree to do so. Therefore, as a member, you can prevent any possibility of losing management privileges by voting against any amendment that may potentially deprive you of it.
Choice of Taxation
LLCs enjoy the benefit of choosing the type of business taxation to apply to the profits and gains of the business. For federal income tax purposes, the IRS designates new LLCs as either sole proprietorships or partnerships. However, this default designation is not permanently binding, and LLC members can also elect to treat the business as a corporation for tax purposes by filing IRS Form 8832. The LLC must adhere to all relevant tax reporting and payment requirements for a minimum of 60 months before you can make a new election to revert back to a partnership or sole proprietorship. Sole proprietorships and partnerships are subject to a single layer of taxation that the IRS imposes at the member level -- the business entity has no obligation to make a single tax payment. In contrast, a corporation is subject to two levels of taxation: the entity itself must pay income tax on earnings, and the members must be pay additional personal income tax when they receive a distribution of after-tax earnings.