1. General Information About LLCs
2. Advantages of a Limited Liability Company
3. Disadvantages of a Limited Liability Company

An LLC is a company legal structure that combines pass-through taxation with limited personal liability. 

General Information About LLCs

Your level of protection against liability depends on what type of business entity you have set up. As a business that values liability protection but doesn't wish to deal with a lot of bureaucracy, LLCs are a moderate option to consider. Limited liability companies (LLCs) are one of the newer models of business entities in US law. They were first recognized in 1977 by the state of Wyoming. 

A corporate structure provides heavy personal liability protection, but comes with double taxation; LLCs keep the same legal protections but avoid excess taxation. Each member of an LLC, also known as a sole proprietor, is taxed as an individual. All business income is claimed directly on individual members' tax returns. A C corporation is usually chosen when the owners wish to leave profits in the business in order to promote business growth. 

It's important to hire an attorney when setting up an LLC, because misinterpretation of LLC regulations can leave you and your family personally exposed. A lawyer will help you decide how to best structure your company and comply with applicable laws. Learning how to successfully set up your LLC, and taking time to understand the pros and cons of this option, is an investment in the future of your business. 

Advantages of a Limited Liability Company

Members choose how invested they are in the company; their liability is limited to the assets they put in. However, it is still possible to go after members for criminal behavior or negligence in management. Passive investors see the same protection benefits as they would when investing in a corporation.  Since business income is treated as personal income, you are not required to pay corporate tax on it. The IRS keeps track of the business' profits and losses through IRS Form 1065. LLCs do not file taxes. 

An LLC can have an unlimited number of members. Members can invest any amount of money into the business, whether or not it's proportional to their ownership percentage. Members are granted certain percentages of profits through the operating agreement created at the outset of LLC formation; initial investments from each member do not need to mirror the percentages of profits assigned to that member.

Management is also more flexible than in other business entities. An LLC doesn't have stringent requirements for yearly meetings, financial reporting, or a board of directors. Since LLCs are privately owned companies, a change of ownership is never reported to the Securities and Exchange Commission. At the same time, formally creating an LLC does show dedication to the success of your business, which can help you build trust with your future customers, business partners, vendors, and workers. 

Members of LLCs are also protected from the debts or credit collections of fellow members. A charging order can be placed to collect the profits of that individual member, so that the business never has to be dissolved due to a judgment or garnishment placed on one member. Member privacy is protected in all states, but especially in Wyoming. LLCs give members the extreme flexibility to distribute profits and losses in variable amounts. 

When the LLC is taxed as a Subchapter S (also known as an S corporation), there are additional benefits: 

  • A nonresident alien can become an owner 
  • A partnership or corporation can legally be considered an owner 
  • You can have greater than 75 owners 
  • You can have 80 percent or greater ownership in another corporation 
  • You can have ownership percentages that are disparate from the percent investment in the business 
  • Owners can claim a business loss deduction on their personal taxes that is greater than their monetary investment in the business 
  • Owners can be hands-on with the business without fear of exposing themselves to personal liability

Disadvantages of a Limited Liability Company

LLCs don't benefit from the ability to issue stocks to secure investors. The investor pool may be more limited because of the legal work involved in adding a member to an LLC. There are more fees associated with filing as an LLC than as another business entity (such as sole proprietorship). There are also yearly renewal fees in many states, although these are generally less than the fees paid by C corporations.

If you need help with forming an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.