Spotlight on Limited Liability Companies
The Limited Liability Company (LLC) is a recognized business entity in all 50 states. LLCs are gaining popularity with small business owners because they combine the benefits of a corporation with the tax advantages and management flexibility of a partnership.
The main similarities between LLCs and corporations are:
• Both are legal entities created by a state filing
• Both help protect personal assets from business liabilities
• Both have few ownership restrictions
The main differences between LLCs and corporations are:
• Corporations issue stock and are owned by stockholders. LLCs do not issue stock. Like partnerships, LLCs are simply owned by the members and/or the managers of the company.
• Corporations are required to hold annual meetings and keep written minutes. LLCs do not have this requirement, resulting in less official paperwork.
• Corporations are taxable entities, and (except for Subchapter S corporations) they must pay taxes on their profits at the corporate tax rate. LLCs, like sole proprietors, partnerships and S Corporations, are "pass-through" tax entities. This means that the profit or loss generated by the business is reflected on the personal income tax return of the owners, thus avoiding the double taxation of paying corporate tax on profits and then personal income tax on distributions of profits. Because of their flexibility and relative simplicity, LLCs are well suited for both start-up businesses and more mature businesses. Because of their advantages LLC formations now out-number new corporation formations in several states.
LLCs have several "ease of use" advantages:
• They provide greater management flexibility than do corporations. For instance, corporations are required to have a formal structure with directors and corporate officers. LLCs are simply run by the members and/or managers.
• They provide greater flexibility with regard to income distribution than do corporations. When corporations pay dividends, those profits must be distributed evenly on a dollar per share basis. LLCs may distribute income as desired.
• If a small business is interested in "pass-through" taxation, then LLCs have an advantage over S Corporations with regard to ownership flexibility. All shareholders of S Corporations must be citizens or permanent residents of the United States and there may be no more than 75 shareholders in total. LLCs do not have these restrictions, again allowing greater flexibility.
Corporations issue stock and LLCs do not. Corporate ownership is most easily transferred using sale of stock. If your business intends to sell shares of stock to investors or if a public stock offering are in your plans, then an LLC may not be right for you.
Be it a corporation or an LLC, it is very important to form a business entity that protects your personal assets and your family. If an LLC is right for you, it can be formed for you in any state. As the needs of your company change, the existing business structure can be amended or a new business structure can be formed quickly, easily and affordably.