A limited liability company, or LLC, is a business structure allowed by state statute. Like a partnership or S corporation, LLCs are pass-through companies whose profits are passed along to the owners. What makes LLCs stand out from other business entity designations is the protection given to owners in regards to liability.
As the name suggests, a limited liability company limits the liability of its owners. You can form an LLC even if you are the sole owner of the company, and many people do choose to form an LLC rather than working as sole proprietors. Doing so protects them from debts and lawsuits levied against the business by establishing the LLC as a separate legal entity with powerful liability limits.
When it comes to tax laws, LLCs are the most flexible type of business. LLCs can be treated as sole proprietorships, partnerships, C corporations or S corporations at varying times without needing to change their entity designations. This allows you to change the way your business is taxed as it grows without needing to worry about the hassle of re-designating it.
For example, you might start up a fresh business as an LLC. In its early years, it will be taxed as a sole proprietorship, and the IRS will treat it exactly the way any other sole proprietorship would be. As the business grows, you can opt to have it taxed as an S corporation. This change is fluid and comparatively simple, and it provides you with maximum options throughout the life of a company.
Pros:
— Limited liability for owners
— Flexibility for tax structure and allocations
— Relatively simple to establish
Cons:
— Liability protection for single owners is not perfect
— More complex to establish than a sole proprietorship or partnership
— Does not offer additional tax benefits beyond any other designation
An LLC is your best choice if you are running any type of company with substantial liability risks. It’s also a smart choice if you’re starting a small start-up with plans for expansion as it will grow and adapt more smoothly than any other type of business.
