A limited liability company (LLC) is a unique business entity that combines the taxation benefits of a partnership with the limited liability status of corporations. The owners of an LLC are referred to as “members” and can range from one to several. For a general overview on different business structures, check out our video series on choosing the right business entity for you.
LLCs are created and governed under state law. Depending on the state of formation, owners can be individuals, corporations or even other LLCs. See the video below for an overview of LLCs, and continue reading for more info.
Why Should I Consider LLCs?
LLCs offer business owners several advantages, such as:
- Limited liability: Absent fraud and criminal behavior, owners are not personally liable for the debts and obligations of the LLC.
- No maintenance: Unlike corporations, LLCs don’t have annual-meeting and recordkeeping requirements.
- Election of tax treatment: LLCs elect how they’ll be taxed, and if they elect to be taxed as a partnership or S corporation, business profits and losses “pass through” to each owner’s individual tax return.
What Are the Disadvantages of LLCs?
The main disadvantages of LLCs are:
- Difficult to obtain outside investment: Generally, investors prefer to invest in C corporations, and LLCs can’t go public on a stock exchange.
- Limited life: Depending on the state of formation, LLCs could cease to exist if one owner departs or dies.
- Self-employment taxes: If you don’t elect to be taxed as an S-corporation, you could be subject to the employer’s portion of self-employment taxes.
LLCs: Flexibility and Practicality
If you are interested in the flexibility LLCs offer, learn how to form one. If you want to learn more about different business entities, check out our overview of the different types of business structures.