The Definition and Benefits of an LLC

A limited liability corporation (LLC) is one of many business entities that a small business owner may choose to create as he or she embarks on his or her entrepreneurial adventures. Like any other business entity, a limited liability company has both advantages and disadvantages. By becoming familiar with these LLC pros and cons, entrepreneurs can better decide whether the LLC business entity is the right choice for them and their new business.

The Basics: What is an LLC 

The letters “LLC” stand for “limited liability company.” The LLC is not a traditional business entity such as a corporation or a partnership (forms of business that exist and that can be formed because they have been in existence since before the creation of statutes. This means that an LLC is a “creature of statute” and any person looking to form an LLC must strictly comply with their state’s laws governing the creation and operation of LLCs.

What are the Benefits and Drawbacks of an LLC? 

An LLC gives business owners limited personal liability, one of the chief benefits of the corporation business entity. Business owners who form sole proprietorships or partnerships risk having their own personal assets garnished or seized to satisfy the debts and obligations of the business. Corporations (and LLCs) protect the personal assets of the business owner(s) from being used to satisfy the business’s debts and obligations.

In addition, LLCs have to additional benefits that may be attractive to business owners:

Simplicity of creation and operation: Compared to some other types of businesses, LLCs can be relatively simple to create and operate. (Obviously, the larger the business enterprise the more detailed your initial filings will need to be.) 

No “double-taxation”: One significant drawback to corporations is that a corporate shareholder will have his or her profits from the business taxed twice – once on the corporation’s business tax return, and again on the individual’s tax return if the business pays him or her a dividend. This means more of the company’s profit goes to pay for taxes. By contrast, the LLC’s profits are reported and taxed only on the owner’s individual tax return.

The drawbacks of an LLC include the requirement that the LLC’s owners pay self-employment taxes and the fact that unless a detailed and binding operating agreement exists, an LLC may cease to exist if the founding member(s) departs the LLC.

This article was originally published on jgpc.com.

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James H. Gulseth

Licensed since 1974

Member at firm JGPC Business & Corporate Law

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