As the name suggests, forming an LLC limits the members' (or owners') personal liability for business actions. Members are liable, but typically only to the extent of their investment in the business. Their personal assets are not considered fair game for settling business debts. This is a big advantage over a regular partnership, where all members (or at least one, in a limited partnership) are personally liable for company debt.
LLC Advantages and Disadvantages
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An LLC is one of the most popular business forms available, and for good reason. There are many advantages of a Limited Liability Company including workplace benefits! Below are some of the primary benefits of an LLC.
Another one of the benefits of a Limited Liability Company is that business profits are not separately federally taxed in addition to the member's taxes. All of the profit passes through to the members, and is filed on each individual's tax return. This is a big advantage over a c corporation, where the profits are taxed and then distributions are re-taxed on the individuals' returns. An LLC may still be charged state and local taxes, but in most states the profits are not separately taxed.
An LLC, although it receives some of the benefits of a corporation, is much simpler to run. While a corporation requires a board of directors, officers, regular director's meetings and shareholder's meetings, an LLC does not require these formalities. It can be run day-to-day as though it were a partnership, even though it has some of the liability and tax protections of a corporation. There is no need to get approval from a board before taking business action, one of the key workplace benefits of an LLC. It makes running an LLC much easier on business owners.
Unlike corporations and partnerships, an LLC has flexibility in how it operates. An LLC, in its Operating Agreement, can decide to distribute profits in proportions other than investment percentages. In addition, one of the advantages of an LLC over an S Corp is that an LLC doesn't have restrictions on the type and number of partners the way an S Corporation does. In fact, your members can even be foreign nationals or other companies, with no limit on the maximum number of members.
In a normal partnership, any member who wants to limit his or her liability can no longer be involved in the day to day management of the business. One of the advantages of a Limited Liability Company is that all members are protected from personal liability without any restriction on their ability to manage and participate in the LLC.
An LLC, since it is a separate entity, can apply for and build credit separately from the partners' personal credit. This is another benefit to a limited liability company because it helps eliminate personal liability for business debt, as well as avoiding tension among partners regarding creditworthiness.
Although LLC's are relatively new in many states of the US, they have been in operation overseas for over a century. Thus, when investors from other parts of the world are looking to invest, they are familiar and comfortable with the LLC structure. This can also be added to the benefits of a limited liability company. In addition, investing in an LLC is less imposing than bigger corporations, so they provide a great place for foreign investors to enter the American market.
When you think about how much liability you're protecting yourself from, an LLC can be one of the most cost effective things you do. In addition, while it used to be that you'd have to pay thousands in lawyer fees to start an LLC, today you can start one easily online with help from incorporate.com. When you look at the advantages and disadvantages of a Limited Liability Corporation, you find the benefits far outweigh the costs.
While this used to be the case, in 1997 the IRS changed its tax definition of an LLC and limited life was no longer required. As a result, most states have removed the life limitation requirement, and an LLC can now exist as long as you'd like.
Like a partnership, an LLC normally dissolves if one or more members leave. However, one of the benefits of an LLC is that if you have a clause in the Operating Agreement that provides for continuance if a partner leaves or passes away, the LLC can continue without them.
If you are the sole owner of the LLC, your heirs can normally step in and continue operating the business. Normally when a partner in a multi-member LLC passes away, the heirs get a financial claim in the business but no management rights. The remaining partners continue the management by themselves. However, the Operating Agreement can include a provision that on the death of a member, both the financial portion and management rights of the member go to a chosen beneficiary.
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