LLCs are one of the most popular types of business entity. Entrepreneurs find LLCs appealing because they offer limited liability, pass-through taxation, flexibility in management, and have relatively simple requirements.
Like corporations, limited liability companies offer business owners protection against personal liability. If the owner of a sole proprietorship or partnership gets sued, their personal assets, potentially including their home, may be subject to the lawsuit. If the owner of an LLC gets sued, they may lose their business assets, but their personal assets will generally not be subject to the lawsuit.
The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity can file a corporation, partnership or sole proprietorship tax return. Corporate earnings are generally taxed twice when distributed to corporate owners–they are taxed once when the corporation receives income, and again when that money is passed through the corporation to the owners. Partnerships have what is commonly called pass-through taxation, where the partnership income is only taxed when it is passed through the partnership to the partners. There are many considerations here, but generally pass-through taxation is preferred to the double taxation a corporation is subject to.
LLCs are not only flexible in their tax structure, but also in their management structure. Whereas corporations are required to have a board of directors that oversees company operations, LLC’s may be managed directly by the members (LLC owners are called “members”) or by a member-appointed manager or managers. LLC’s have great flexibility in allocating management power. Terms of the operating agreement can provide great detail about when, how, and under what circumstances key decisions are to be made.
LLCs are also appealing because they are easier to create than corporations, and subject to fewer formal requirements.