Why Set Up an LLC?

By Stephanie Kurose, J.D.

Why Set Up an LLC?

By Stephanie Kurose, J.D.

A limited liability company (LLC) is one of the most common types of business structures. Popular among entrepreneurs looking to start or expand their businesses, an LLC offers its owners, or members, a wide array of benefits. However, whether or not an LLC is the right fit for you depends on the type of business you own and your personal needs.

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LLC's Structure and Organization

There are single-member LLCs, which are owned by a single individual, and multi-member LLCs, which can be owned by individuals and other business entities. While an LLC must have at least one member, state law generally does not restrict the maximum it can have.

The internal affairs of an LLC are typically governed by an operating agreement, which is similar to a corporation's bylaws. The operating agreement is a legal document that contains rules, guidelines, and restrictions for a business's undertakings.

Benefits of an LLC

An LLC contains characteristics of two of other common business structures: partnerships and corporations. LLCs take the best attributes of both.

Personal Liability Protection

Similar to a corporation, an LLC provides its members with personal liability protection. This means that individual members are not legally responsible for any of the business's debts or obligations. Under state law, an LLC is a distinct, legal entity separate from its members. Thus, creditors can only go after the company's assets to satisfy any debts. Members' private assets, such as their homes or cars, are protected from creditors, except in very narrow circumstances.

LLCs have the same liability protection as corporations, but they are much easier to establish. Partnerships are also relatively simple to set up, but they do not provide owners with personal liability protection.

Flexible Tax Options

The Internal Revenue Service (IRS) does not have a separate category for LLCs when it comes to filing taxes. The agency gives members the option to file as a sole proprietor—for single-member LLCs—or as a partnership or corporation for multi-member LLCs.

Deciding which option is right for you depends on your personal preferences. On one hand, corporations are taxed as a business and are subject to entity taxes. Each shareholder is also taxed on their distributions. Partnerships, on the other hand, are not subject to an entity tax and members only pay taxes on their personal tax return.

Management Flexibility

Unlike a corporation, LLCs are not subject to formal management requirements, such as holding annual board meetings and keeping written records of the decisions made at them. An LLC can also, in its operating agreement, provide for varying member rights, priorities, and obligations to tailor operations to their business needs. Members can be individuals or business entities like other LLCs, corporations, or organizations.

There are many benefits to setting up an LLC, but ultimately the decision depends on your business's needs. If you own a business by yourself or with only one other person, a sole proprietorship or partnership may be a better fit because they are more flexible than an LLC. If you would like more information, contact an online service provider who can help answer any of your questions.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.