A Limited Liability Company, or LLC, is a state statute-created business structure that offers an alternative to other forms of closely held joint ventures, such as cooperative corporations, S corporations and C corporations. The IRS notes that certain aspects of the LLC structure are similar to a partnership, but that LLCs have their own distinct advantages that may offer business owners financial protection from various problems including creditors and taxes.
Fit your business needs with the right LLC package
Liability Protection for Management Decisions
Although the laws that govern LLCs vary from state to state, many states have indemnification provisions regarding LLC management. This means that if a manager or owner, who is known as a member, of the LLC makes poorly advised decisions regarding company operations and this creates liability-causing events such as financial loss, the decision maker may be protected from related court proceedings that another member of the LLC brings forward. If a member of the LLC files a lawsuit, the company's assets -- and not those of the decision maker -- typically cover the court judgment awards, fines, fees, legal expenses and other results of the court case that would otherwise be personally assessed to the individual.
Protection from Double Taxation
When it comes to corporations, those involved can often experience double taxation. Double taxation means that financial gains are taxed on the entity level and taxed again when dividends are awarded to the corporation shareholders. In contrast, LLCs are a pass-through business vehicle because federal and state taxes are usually only assessed when the gains are distributed to the LLC members.
Protection from Capital Gains Taxes
Members can often both withdraw and contribute appreciable assets, such as investment money, without having those assets suffer from capital gains taxes. The University of Wisconsin Center for Cooperatives calls this a distinct advantage over other forms of joint business ventures, and notes that this may help encourage investments into the business.
Limited Liability to Outsiders
One of the chief benefits of an LLC is that its members typically enjoy limited liability to those outside of the LLC. This means that the LLC, and not the members' personal financial assets, is held responsible for liability-creating events and any subsequently successful judgments against the LLC. In contrast, sole proprietors of a business can often have their personal assets used to cover judgments from court rulings or creditors.