A
Limited Liability Company (LLC ) is a hybrid business entity having
characteristics of both a corporation and a partnership. It is often
more flexible, the owners have limited liability for the actions and
debts of the company, and it is suitable for smaller companies with a
single owner. The primary corporate characteristic is limited liability
while the primary partnership characteristic is the availability of
pass-through income taxation.
Now
available in almost all states, the LLC combines the benefits of
limited liability and pass through taxation, much like an S
corporation. But the LLC's legal structure is much looser, allowing
many companies that find S corporation status too restrictive to take
advantage of its benefits. Small business owners are taking advantage
of the LLC because it is easier to set up and maintain than a
corporation.
Advantages:
-
LLC's
not a separate taxable entity unless it fails in the determination of
the IRS to qualify as a partnership for tax purposes and if so it is
taxed as a corporaiton.
-
Any
gains, losses, credits, and deductions flow through the LLC to the
members, who report them as income and losses on their personal tax
return.
Disadvantages:
-
LLC's
have similar formation, state registration, agent for service and other
costs and corporate procedures to corporations. As there is no state
law structure of shareholders, directors and officers already
established as with corporation, and unless the state has other
regulations, the LLC members create their operating structure and have
an operating agreement. This typically adds additional attorneys fees
for drafting the operating agreement, or otherwise increases risk of
operating without one or with a poorly drafted agreement.
-
LLC's
vary in legal requirements and liabilities by state and do not have the
easy of transfer and investment that a corporation structure provides
and therefore are some times regarded as less preferable to C or S
corporations.
