Choosing a limited liability company as the legal entity for your business may provide benefits not available with other types of entities. Most states throughout the nation adopt similar requirements for creating an LLC. However, you must consider your individual needs and the type of business you will run to ensure that an LLC is the appropriate structure.
Choice of Taxation
A major benefit of opening an LLC that is unavailable to other entities, such as corporations, is the flexibility in choosing the type of tax rules to apply to business earnings. Owners of an LLC are known as members. The IRS will designate a new single-member LLC as a sole proprietorship and all other multi-member LLCs as a partnership. However, immediately upon formation you are eligible to make an election on IRS Form 8832 to change the designation. All LLCs are eligible to elect corporate tax treatment or revert back from a prior corporate election to a partnership or sole proprietorship. Once you make a valid election, the prevailing tax rules are binding on the LLC and its members for a minimum of 60 months before an additional change can be made.
An overwhelming reason for many entrepreneurs to create an LLC is the limitation on personal liability it affords members. The LLC is a separate legal entity from its owners and is solely liable for all debts and obligations that arise in the course of business. In situations where the LLC is unable to make payments to creditors or must breach a contract with a third party, the members have no obligation to ensure performance for the business using personal funds or assets. However, if a member’s actions are beyond the scope of the LLC’s business, a member may incur any personal liability for debts and obligations that relate to those actions. For example, if a member enters a business contract without authority to do so, the contracting party may enforce the contract against the individual member.
Leaving the LLC
Most states allow for an LLC member to leave the business at any time and for any reason. When opening an LLC, the fact that you can easily exit the business if it proves unsuccessful or you find other business interests may be beneficial. Other members of the LLC are unable to keep a member from leaving. However, if the member wrongfully disassociates, he may be liable to the LLC or other members for any loss or damage that results from the wrongful dissociation. For example, when joining an LLC, the operating agreement may stipulate the conditions that constitute a wrongful dissociation. A breach of this agreement may cause a member to incur liability.
When you open an LLC, most jurisdictions provide you with the right to actively participate in the management of the business. This can be a valuable benefit if your intention is to actively involve yourself in your LLC investment. However, a pre-existing LLC may have an operating agreement that stipulates restrictions on member management. Prospective members have access to the conditions of membership before making a final decision to become a member of the LLC.