Advantages & Disadvantages of a Limited Liability Company

By Jill Lewis

A limited liability company, or LLC, is an entity that offers both advantages and disadvantages to a business owner. The advantages can range from liability protection to tax benefits, while drawbacks may include lack of uniformity and consistency among the state statutes governing LLCs. A savvy business owner should consider all these advantages and disadvantages before deciding whether a limited liability company is the preferred structure for her enterprise.

A limited liability company, or LLC, is an entity that offers both advantages and disadvantages to a business owner. The advantages can range from liability protection to tax benefits, while drawbacks may include lack of uniformity and consistency among the state statutes governing LLCs. A savvy business owner should consider all these advantages and disadvantages before deciding whether a limited liability company is the preferred structure for her enterprise.

Taxation

A limited liability company is not subject to the double taxation that burdens corporations, because profits are taxed by the federal government at the member level and not at the company level. Members of a limited liability company are also allowed to take deductions for losses on their personal returns. However, since the IRS considers a limited liability company a partnership, if half or more of the company's assets are sold within a year's time, the LLC will terminate for tax purposes.

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Personal Liability

As its name indicates, a limited liability company protects its members from personal liability for the debts and actions of the business. This is one of the biggest advantages of an LLC, as it protects its members from personal financial loss should the company be sued for not complying with its obligations or for other wrongdoing.

Flexibility

Limited liability companies are more flexible than corporations because they don't need to meet the state requirements for formation and operation of a corporation. LLC members are also free to draw up their own agreements setting forth member responsibilities and duties, and have more freedom in dividing up profits. However, while an LLC can be formed by one member, to be treated as a partnership--which can be beneficial for federal tax purposes--an LLC must have at least two members. This can be a double-edged sword because treatment of an LLC as a partnership by the IRS can prevent it from taking advantage of certain stock options or undergoing tax-free reorganization.

Lack of Uniformity

Another disadvantage of a limited liability company is the lack of uniformity among state statutes regulating LLCs. Limited liability companies operating in more than one state may be subject to conflicting requirements.

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Which Is Better: an LLC or an LLP?

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S Corporation Structure

An S corporation is a tax designation that a business must apply for with the Internal Revenue Service. Used for small businesses, the benefit of the S corporate designation is that it allows the business to be taxed as a partnership. To apply for S corporate status, the business must submit a completed Form 2553 within 2 months and 15 days after the beginning of the first tax year that it wants to be treated as an S corporation.

Advantages of LLC vs. an S-Corporation

A limited liability company (LLC) is a form of business organization authorized by state statutes to accommodate business needs for limited liability, pass-through taxation and operational flexibility. An S corporation is a corporation that enjoys limited liability, as well as pass-through taxation under Subchapter S of the Internal Revenue Code, as long as it meets certain standards. Each type of entity offers certain advantages.

What Are the Tax Advantages of LLCs?

A limited liability company, or LLC, is a business entity that has the advantage of offering personal liability protection for its members: LLC members cannot be held personally liable for the debts or obligations of the company. LLCs are also attractive to new business owners because LLCs enjoy many tax advantages as compared to other entities such as corporations and partnerships.

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