3 Reasons Why a LLC May Be the Business Entity for You
By: Chaunte J. Tate, Esq.
A limited liability company (LLC) is a legal business owned by its members. Many entrepreneurs select this type of entity because it is simpler to form and operate than a corporation and offers more protection from liability than a sole proprietorship. Additionally, the LLC is eligible for “pass through” taxation. This brief article will outline the advantages of a LLC compared to other types of business organizations.
- Pass-Through Taxation
A LLC is not a separate tax entity like a corporation; instead, it is what the IRS calls a “pass-through entity,” like a partnership or sole proprietorship. Under current tax laws, unless a LLC elects for double taxation, it will receive “pass through” taxation. That means the LLC’s income “passes through” the LLC to the members, who in return report their share of profits-or losses-on their individual income tax returns. Simply put, the LLC itself does not pay taxes on business income. Unlike a corporation whose income is taxed twice: first, at the entity level and second, at the owner’s (referred to as “shareholders”) level. For more information about how to take advantage of the tax benefits of the LLC, please consult a certified public accountant.
- Limited Liability Protection
Like shareholders of a corporation, LLC owners are protected from personal liability for business debts and claims. That means if the business itself cannot pay a creditor, the creditor cannot legally come after the member’s assets (i.e. house, car, or other personal property). Because only the LLC’s assets are used to pay off any business debt incurred, the members only lose the capital they have invested in the LLC. This feature is called “limited liability protection”.
- Flexible Management
The owners of a LLC are referred to as “members”. A LLC can be owned by a single member or multiple members. The owners can choose to manage their LLC themselves (referred to as “member-managed”). Or, the owners can opt to bring in outside managers to run the LLC (referred to as “manager-managed”). The details regarding management is outlined and controlled by the operating agreement. An operating agreement is a contract that establishes the rights, duties, liabilities, and obligations of the members. Specifically, how meetings will be conducted, how the company will be managed, what capital contributions are required for each member, and how profits and losses will be allocated. These provisions can be as strict or loose as the members desire.
As you see, the LLC is recommended for entrepreneurs who want pass through taxation, strong liability protection, and business management options. If you have any questions about the advantages of forming a LLC or would like to discuss any other business issue, please contact Chaunté J. Tate, (404) 333-1390, firstname.lastname@example.org.
Source: Eisenberg, Melvin. Corporations and Other Business Organizations. 2015 ed., Thomas Reuters, 2015.