A limited liability company, or an LLC, is a fairly recent recognized business form that combines the limited liability benefits of a corporation with the tax and organizational flexibility of a partnership or sole-proprietorship. This combination of benefits has made the LLC a great vehicle for businesses both big and small.
Arguably the biggest advantage of an LLC is the liability protection it provides to its members, i.e., the owners. This protection means that the members of an LLC will not be held personally liable for the actions of the LLC. This type of protection is superior to the lack of protection offered by a sole-proprietorship or partnership, and is similar to the type of protection offered by a corporation to its shareholders.
To see what this liability protection offers, imagine you own residential rental property either personally or through a partnership and someone is injured due to something faulty on the property. The injured party may sue you personally and, if successful, would be able to pursue collection against all of the assets you own personally, such as your home, bank accounts or retirement accounts. Now, imagine instead the rental property was owned by an LLC of which you were a member. Instead of suing you personally, the injured party would have to sue the LLC and would be limited to collecting against assets owned by the LLC.
With a little imagination, you can see why the liability protection that results from LLC formation is so beneficial to all types of businesses, whether that business is your primary source of income or is simply a part-time endeavor. The part-time grillmaster making brisket to sell during local community festivals or the weekend baker making treats for bridal showers and retirement parties does not want an inadvertent fire or a round of food poisoning to put their entire personal savings at risk, and, thus, should consider some form of business formation as much as a large trucking operation. Or try another scenario — a family farm may want to keep the farmland in one LLC and the farm’s operations in another, with the goal of shielding the farmland from liability stemming from an accident involving the farm equipment.
Flexibility and Ease
The IRS treats an LLC as a “pass-through” entity, meaning the profits and losses pass through to the members, who in turn report the profits and losses on their individual tax returns, similar to the way a sole-proprietorship or partnership is taxed. The result is a less burdensome tax reporting process. In the alternative, an LLC may elect to be taxed as a corporation if doing so proves advantageous.
Moreover, on the whole an LLC is more flexible in its operation requirements than a corporation is. The members of an LLC enter into an operating agreement that sets forth the rules of how the LLC will operate, such as who is to manage the business and how often meetings are required and the manner in which they should be conducted.
Corporations still have their place, of course, but the ease of start-up for an LLC makes it an attractive option. Any business operation, no matter how small, should consider forming an LLC, if for no other reason than to offer those behind the business peace of mind that their personal assets are protected from the activities of the business. The start-up process is fairly simple and the on-going operations can be as simplified as the members desire.
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