Limited Liability Companies (LLC) were created in order to provide protections of limited legal liability and tax efficiencies to companies that they would otherwise not be eligible. In other words, a Limited Liability Company (LLC) allows businesses to enjoy a range of corporate tax advantages and other opportunities that would normally not be available to them.
Advantages
One big advantage of an LLC is that the owners are legally considered as individuals rather than a single entity that is taxed as a whole. Profits and losses of members are reported on their personal tax returns, which can be a healthier arrangement for the company as a whole, at least under some circumstances. Each state has different rules for forming an LLC, but in all cases the LLC must have a unique name, not be in a restricted field and be completely transparent about its LLC status. Often there is an operating agreement that defines the structure and finances of the organization. Special licenses and permits on the state and local level may also be required. Usually, a public announcement that you are forming an LLC must be made.
There are distinct advantages to forming an LLC. The limited liability feature means that the members of the LLC are at least partially protected from the actions of the business as a whole. That means if the LLC becomes overwhelmed by debt or becomes embroiled in a lawsuit, the personal assets of the members are exempt. This gives the LLC members many of the same protections that shareholders of a corporation enjoy. It can also greatly simplify paperwork and reduce start-up costs. Profit sharing is made easier, allowing profits to be divided in a way that more accurately reflects how much capital and "sweat equity" was invested by each member.
Disadvantages
However, limited liability means just that - limited. One disadvantage of forming an LLC is that it does not protect its members from all possible wrongful acts committed by themselves or by their employees. It is also quite easy for an LLC to be dissolved if a member leaves, which can result in complicated obligations for the remaining members to either reform the LLC or try something different. It can also be a challenge for members to pay their individual taxes, which usually includes making payments to Medicare and Social Security. This means that the filing of taxes by individual members may become much more complicated than it might otherwise be.
Because the legal and financial arrangements of every business are unique, there is no universal way of determining whether an LLC is the right legal structure for any individual company. That is a decision that is usually made only after close consultation with the company's legal and financial advisers. But for the right kind of business, a Limited Liability Company is the perfect way to divide profits while providing the company's owners and investors with protection from legal risks and simplifying overall tax liabilities.
