Benefits of a Limited Liability Company
The LLC as an entity choice is very popular for the reasons below. The focus of this article is on many of the benefits of forming and operating an LLC.
LLCs offer two kinds of liability protection. Everyone knows about the protection from inside liabilities (i.e. protection from the LLC’s liabilities). In fact, the protection from inside liabilities is often the main reason for incorporating a business or forming an LLC. The benefit that is unique to the LLC is protection from outside liabilities. The term “outside liabilities” refers to the personal liabilities of the LLC’s members.
Inside Liability Protection
- personally and directly injures someone
- personally guarantees a bank loan or debt that the LLC cannot pay back
- does not keep the LLC and personal business separate
- does not pay the taxes that are withheld from employee wages
Outside Liability Protection
An LLC has 3 choices for federal taxation purposes:
- A single-member LLC can do nothing and it will be taxed as a sole proprietorship and report profits on Schedule C of personal Form 1040;
- A multi-member LLC can do nothing and it will be taxed as a partnership and will need to file an informational return (Form 1065) and issue K-1s to the owners;
Each of these alternatives (except the C Corporation) are described as “pass through” choices as the business income “passes through” the business to the owners, who then report their share of the profits, or losses, on their individual federal income tax returns. In other words, the LLC does not pay federal taxes, unless it is classified as a C Corporation.Learn more about the benefits of the S Corp LLC →
LLC are traditionally much less formalistic than a corporation. LLCs are very flexible and there are very few restrictions. LLC members are not required to hold regular meetings or keep formal minutes. A good business decision is to create the rules that will govern the business upfront in the Articles of Organization and the Operating Agreement. Beyond these two documents there is less paperwork and less stringent requirements than other business entities such as a corporation.
An LLC does not require formalities and can be run day to day without the need to get approval before taking business action. This is a very important workplace benefit because it makes running an LLC easy on the owners.
Forming an LLC may help a new business establish credibility and legitimacy with customers, employees, and vendors because it appears there is a formal commitment made to the business by the owner. The professionalism associated the the “LLC” at the end of the business name should not be underestimated. Your business is a sophisticated operation and taking the extra step of forming an LLC shows your commitment to excellence.
Flexible Management Structures
The LLC can be managed any way the owners choose. In the Article of Operation, the owners choose the management structure they want for the LLC, either member-managed (managed by all the members equally) or manager-managed (managed by a specific person). Then in the Operating Agreement, the owners can define clearly how their structure will operate, and what each member is responsible for.Learn more about member-managed vs manager-managed LLCs →
If the owners choose “perpetual” duration in their Articles of Organization, the LLC can last indefinitely. A shorter duration is possible, depending on the nature of the company. For an LLC that is formed to last more than a year (or perpetually), some formalities must be followed, such as filing an annual statement with the secretary of state each year. Even if a member leaves or dies in a multi-member LLC, the LLC can continue with all of the same licenses and bank accounts. Perpetual LLCs last until they are dissolved if the business is formed and operated correctly.
No Ownership Restrictions
LLCs may have an unlimited number of members. The owners of the LLC can be foreign persons, other corporations or LLCs, or any kind of trust. Only a few types of businesses cannot be LLCs, such as banks and insurance companies.
In conclusion, LLCs are very popular with small business owners because they offer a great combination of protection and flexibility. They shield their members from personal liability while giving them tax options, credibility, simplicity, and few restrictions. Choosing an LLC for your business entity may be your best choice.