A Limited Liability Company, often referred to as an “LLC”, is a type of business entity that limits the personal liability of each member of the LLC. Members of LLCs, in most states, can be individuals, corporations, other LLCs, and foreign entities. Most states allow “single-member LLCs” if there is only one member, and there is also no limit on how many members an LLC can have. Banks and insurance companies, generally, cannot be LLCs. Individuals must be at least 18 years old. But what are the benefits of an LLC?
The IRS will treat LLCs as either a corporation, partnership, or as part of the owner’s tax return. Usually, an LLC with at least two members is classified as a partnership for federal income tax purposes, but there are some exceptions. If the LLC files a Form 8832 and elects to be treated as a corporation, then it will be treated as a corporation. This is also true for an LLC with only one member, as it will be treated as an entity “disregarded as separate from its owner”, unless it files form 8832 and elects to be treated as a corporation.
Benefits of choosing to be an LLC:
Owners, members, or partners of an LLC have liability protection:
- Owners are protected from personal liability for the debts of the business.
- Personal assets are not threatened by lawsuits or claims, only the assets owned by the business can be subjected to these issues.
LLCs get to take advantage of tax benefits available to partnerships.
- The IRS taxes LLCs as sole proprietorships or general partnerships.
- In an LLC the profits and losses are passed onto the members of the LLC. Each member will pay taxes based on their proportionate share of the profits and losses.
- Avoids the double taxation that occurs with C corporations.
LLCs provide ease when it comes to adjusting ownership or adding other members.
- Instead of issuing stock, like a corporation, an LLC can simply expand ownership and bring in additional members.
- Unlike corporations, owners of LLCs have more flexibility to make changes to the managerial structure without having board meetings.
- Corporations have to abide by recordkeeping requirements for all meetings, whereas LLCs do not have to keep such extensive records (though it is wise to keep records of important business meetings).