An LLC, or limited liability company, offers distinct advantages over other more traditional forms of doing business. For business owners, an LLC offers the advantages of limited liability in conjunction with the ability to elect how the entity will be taxed. Additionally, owners, known as members, of an LLC are not obligated to adhere to rigorous corporate formalities in the conduct of their business.
Limited Liability Protection
As a creature of state statute, an LLC is recognized as a separate legal entity distinct from that of its individual members. The principal benefit of conducting business as a LLC is that it insulates the members of the enterprise from liability for the debts of the business. Such protection is not available to a sole proprietor, nor is it available to a business operating as partnership, in which each individual partner is liable for the debts of the partnership. Since all states allow the formation of single-member LLC’s, by converting to an LLC, a sole proprietor can avail himself of the limited liability protections afforded shareholders in a corporation.
Pass-Through Taxation Of Earnings
One of the distinct disadvantages of conducting business as a traditional corporation is that the earnings distributed to shareholders are taxed at the corporate as well as at the individual level. Since in most cases, an LLC is treated as a partnership for federal income tax purposes, profits of the business are taxed only once. The LLC itself is not taxed, but rather profits and losses of the business are passed through directly to its individual members. Although an S corporation provides similar tax benefits, many businesses may not meet the strict qualifications for S corporation status.
Unlike a partnership or a traditional corporation, an LLC offers its members a choice as to how the entity will be taxed for federal income tax purposes. An LLC can elect to be taxed either as a partnership, as a sole proprietorship, or as a C or S corporation.
Lack Of Corporate Formalities
Pursuant to statute in some states, in order to preserve the limited liability protection afforded shareholders, a corporation must adhere to and observe certain formalities. These may include the requirement to hold annual board of directors and shareholder meetings. An additional burden may be the requirement to document any business conducted at meetings by maintaining minutes. However, in most jurisdictions, an LLC is not required to hold annual meetings, maintain minutes of member meetings nor keep records of company resolutions.