Why Set Up an LLC?

by Anna Assad

A limited liability company offers many benefits, but whether or not the business type is right for you depends on your trade, personal needs and requirements. An LLC is a business organization structure with the legal faucets of both a partnership and a corporation. The owners of an LLC are referred to as members. The internal affairs of an LLC are generally governed by the operating agreement, a document drafted by members containing the rules, guidelines and restrictions for business operations.

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Protects Your Assets

Your private assets, like your car and home, cannot be taken by creditors to satisfy the business debts of the LLC. Organizing your business as a corporation provides you with the same protection from creditors, but the formation procedures for a corporation are both more expensive and complex than the procedures for an LLC. A partnership formation is also less complicated than that of a corporation, but one member of the partnership may be held personally liable for company debts under state laws.

Gives You Tax Options

The IRS does not have a filing designation for LLCs. An LLC with one owner files income taxes as a sole proprietorship, but an LLC with two or more members can file as a partnership or corporation. A corporation is taxed as a business, and each shareholder is subject to taxes on distributions. You are not taxed twice, like a corporation is, if your company files as a sole proprietorship or partnership. Each member of the LLC is taxed on his interest alone, and the company itself is not subject to an entity tax.

Less Restrictions on Your Business

Some corporation types are subject to restrictions on shareholders and stock availability; the corporation may only be allowed to have one class of stock outstanding. A stock class is a category the shares fall into, with each category having individual rights and limitations. LLC members can be individuals, other business entities, pension plans or other organizations. An LLC is not subject to stock class restrictions, allowing the company to provide for varying member rights, priorities and classes.

Gives You Management Control

The members of your LLC decide how the company is managed. You may manage by members -- where all of the owners have management rights -- or hire an outside person to manage the company for you. Corporations are typically managed by a board of directors chosen by the person forming the business, but the shareholders may vote to remove or add persons to the board.