A limited liability company (“LLC”) is a business entity that combines the benefits of a corporation with that of a sole proprietorship or partnership. The basic features of an LLC are that the owners (or members) are not personally liable for the debts of the business and may elect to have the profits and losses taxed as “pass-through” income on their personal returns or have the profits and losses taxed as a corporation. It is a relatively new form of business. While there are state formation fees, filing fees, and annual fees, it is easy to begin a business as an LLC.

Advantages

LLC v. Corporation

Corporate formalities such as the issuance of stock are not required in LLCs. Instead, each owner (member) has an interest in the company and voting and profit-sharing rights. In addition, it is sometimes much easier to raise money for a new LLC business than for a sole proprietorship or partnership because interests in an LLC can be sold and transferred.

Another advantage is that the sale of the interests is not subject to state and federal securities law unless the sale is advertised and over 35 investors are involved. As well, there are no limitations upon the number of investors that may be involved in an LLC or upon an investor’s citizenship.

Unlike a corporation where profits are paid out as dividends according to how much money or property a person initially invested in the business, an LLC can distribute its profits in any fashion it desires. This allows flexibility in how members contribute to the business. For example, one person may not contribute any money to the business, but may be overseeing its daily operations, while another member may contribute the bulk of the monetary investment. The members are free to decide on how each may be reimbursed for his investment. Regular annual meetings of the members or managers are not required as they are for corporations.

LLC v. Sole Proprietorship or Partnership

The advantage over a partnership or sole proprietorship is that LLC owners enjoy limited personal liability. In addition, it is generally easier to raise money and transfer ownership in an LLC than some other types of businesses.

Disadvantages

LLC v. Corporation

One of the disadvantages to an LLC is in the area of taxation. In a corporation, only salaries are subject to self-employment taxes, while both salaries and profits are subject to self-employment taxes in an LLC. In a C Corporation, profits are not always immediately distributed as dividends, but in an LLC, profits must always be reported as a member’s income. Additionally, fringe benefits must be reported as taxable income for an LLC member. Employees of C corporations and some S corporation do not have to report fringe benefits as taxable income.

LLC v. Sole Proprietorship or Partnership

There is more paperwork to maintain and file with an LLC than with a sole proprietorship or partnership. Additionally, it is very important that the member’s personal records, funds, and business be kept separate from that of the LLC’s in order for its members to claim that they are not personally liable for the LLC’s debts and liabilities.

Conclusion

An LLC is a hybrid form of business that essentially allows its owners to enjoy the combined benefits of a corporation and a partnership or sole proprietorship. The owners are allowed to determine how each will be reimbursed for their investment in the business, while allowing them to enjoy the protection of limited personal liability for the business’s debts and liabilities.