A limited liability company, or LLC, is a formal business structure that allows one or multiple owners several financial protections and other benefits relative to a corporation. A corporation is formed when business founders file formal articles of incorporation in a state.
Personal Financial Liability Protection
A primary reason business owners turn to an LLC is because of the simple structure and ability to gain personal liability financial protection. Unlike a sole proprietor, an LLC owner or member is treated as a separate entity from the business. This point is true with a corporation, but an LLC is much easier to set up and manage. If the business is sued for a company activity that harmed another person, the financial assets of the individual owners aren't typically at risk.
An LLC allows for much greater management flexibility, whereas corporations must operate with strict parameters on the roles of directors and officers. When you own an LLC, the owners collaborate on the roles and responsibilities of each person in the operation of the company. In a corporation, the board of directors guides the strategic direction of the business and the executive management team carries it out with daily oversight. The comparative flexibility of an LLC allows managers to form their own vision, make adjustments to strategy with more immediacy and take a level of involvement that suits their preferences.
There is much less formality required to start and manage an LLC relative to a corporation. Registration for an LLC is fairly simple and cost-effective, according to the U.S. Small Business Administration. The process of incorporating a business is much more intensive. You also have fewer meeting requirements with an LLC, whereas a corporation must follow structural requirements in line with their by-laws and applicable regulations. LLC owners also have significant flexibility in how the distribute earnings based on the capital investments and time involvement of each owner.
A compelling tax advantage of an LLC is that the earnings of the business are only taxed once. In contrast, corporations allow for what is known as double-taxation. In an LLC, each member pays taxes on his distributed earnings through what is known as pass-through income. The business itself doesn't pay taxes. A corporation pays business taxes on its earnings and then individual shareholders have to pay capital gains taxes on the dividend income they receive, as well as on stock price gains.
- byryo/iStock/Getty Images