What is an LLC?
A Limited Liability Company (or LLC) is just that – it protects you, as the business owner, from being held personally liable for the actions of your business (or the LLC). If there is a lawsuit against your business (and in our lawsuit happy country, this is bound to happen at some point), the LLC protects you from the personal risks. This means that your personal assets stay safe. Additionally, LLCs have other benefits.
LLCs offer pass-through taxation, meaning that taxes are not paid at the business level. When you create an LLC, income and losses are reported to the IRS on your personal tax return. When taxes are due, they are paid on the individual level.
LLCs provide flexible management structures, allowing you to take control of daily operations and long-term growth strategies. Corporations have a predetermined management structure where directors supervise the essential business decisions, while officers take on running daily functions of the business.
LLCs face fewer compliance requirements than corporations, as well as fewer state-imposed annual requirements and ongoing formalities.
With all of the great benefits of an LLC, there are still some disadvantages to explore, as well.
LLCs have higher ongoing expenses through state filing fees, annual report and/or franchise tax fees, and some states even require owners to publish notice of the LLC formation in the local newspaper.
Ownership is more difficult to transfer in an LLC, since typically all owners must approve the changes or ownership addition. Corporations utilize shares of stock to manage ownership.
Because LLCs are a newer type of business structure, there is less legal precedent for this entity type.