A Limited Liability Company (LLC) is a business structure allowed by state statute. It is a type of legal entity that separates the company from its owners, which means that the owners are not personally liable for the companys debts or liabilities. The assets and debts of the business remain separate from the personal assets and debts of the company's owners. If the company goes bankrupt, creditors cannot go after the owners' personal assets, only that of the business. LLCs are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship. While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of an LLC is a feature of a partnership rather than an LLC. LLCs are taxed on a “pass-through” basis, which means that the profits and losses of the business pass through to the owners' personal tax returns.
Advantages of forming an LLC include:
-
Limited liability: Members (which is what the owners of an LLC are called) are shielded from personal liability for acts of the LLC and its other members. Creditors cannot pursue the personal assets (house, savings accounts, etc.) of the owners to pay business debts. The personal assets of sole proprietors and general partners, on the other hand, can be pursued against the business’ debts.
-
Simplified taxation: LLCs are taxed on a “pass-through” basis, which means that the profits and losses of the business pass through to the owners' personal tax returns.
-
Management flexibility: LLCs have fewer formalities and less paperwork than corporations, and they offer more flexibility in management structure.
Disadvantages of forming an LLC include:
-
Cost: LLCs can be more expensive to set up than sole proprietorships or partnerships, and they may require annual fees and other ongoing expenses.
-
State-specific regulations: LLCs are regulated by state law, which means that the rules and regulations can vary from state to state.
-
Limited life: LLCs have a limited life span, which means that they may dissolve upon the death or departure of a member.
