Four Reasons for an LLC

By Cindy Hill

A limited liability company, or LLC, is a business structure that has some of the advantages of a corporation and some of the flexibility of a sole proprietorship or partnership. Limited liability companies are controlled by state laws, but the four primary reasons for forming an LLC are the same throughout the country.

Liability Protection for Owners

A limited liability company offers personal asset protection for the owners similar to that offered by a corporation, but is less formal and burdensome to create, according to "The Wall Street Journal." If the LLC cannot pay its bills, or winds up in litigation, creditors usually can not access the personal assets of the owners to satisfy the debt or judgment against the LLC, but are limited in their collection to the assets held by the LLC itself. As with corporate business structures, there are exceptions to this liability protection, and LLC owners who co-mingle their personal funds or personally guarantee loans or debts of the LLC may be putting their personal assets at risk. However, careful LLC administration, along with the LLC holding business liability insurance, may provide significant protections for the owners.

Financial Entity

An LLC provides a discreet entity which can hold and manage real estate on behalf of multiple owners, procure loans and enter into contracts for business purposes, and act as the operating body for small businesses or family businesses such as a farm, suggests the Ohio State University Cooperative Extension. Without a legal entity to undertake the financial actions required of a business, multiple signatures might be required on documents like deeds, leases, loans and contracts, or such documents may wind up being personal obligations rather than actions of the business. Having an LLC lets the business function separately from its personal owners.

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Estate Planning Tool

An LLC is a valuable estate planning or business succession planning tool, giving owners the flexibility to transfer interest in the LLC to new owners or the next generation without disruption of the business operations. For example, the Ohio State University Extension suggests that Ohio farmers can utilize an LLC to operate a family farm business, providing an efficient way for the farm to continue running as subsequent generations take on more of the business responsibilities.

Pass-Through Taxation

Each state has its own laws and regulations pertaining to LLC formation and management, advises the IRS, but one of the chief benefits of LLC formation in any state is that of pass-through taxation. A limited liability company is not taxed separately on its income, the way a corporation is taxed on corporate income. Instead, the profits generated by an LLC are divided amongst the owners in accordance with their operating agreement terms and are passed through to be claimed on the owner's income tax returns as personal income, assuming that the LLC is organized as a partnership or sole proprietorship. Some LLCs can be classified as corporations, the IRS advises, although this may well obviate the advantages of an LLC structure.

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A sole proprietor who wants to transfer assets and debts to a newly-formed limited liability company, or LLC, can ordinarily do so, but only under certain circumstances. The transactions will be governed by the state law that authorized the formation of the LLC and any agreements between owners restricting capital contributions or withdrawals that change ownership interests. If you are converting a sole proprietor business into a single-owner LLC, you have a lot of leeway to determine how you capitalize your interest in the new company, but you must account for asset transfers properly for state and federal income tax purposes.

Is a Corporation the Same as an LLC?

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A limited liability company (LLC) is a type of company that exhibits characteristics of both partnerships and corporations. Like a corporation, an LLC has a legal existence separate from that of its owners, who are called "members." Like a partnership, though, it avoids the double taxation problem that frequently accompanies corporations. Limited liability, flexibility in tax treatment and simplicity of operation have made the LLC a popular choice for small business start-ups.

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