LLCs (Limited Liability Companies) are a relatively new form of business structure created by state statutes, but one that is gaining quick popularity. There are a lot of real advantages to registering your business as an LLC, mostly evident in flexibility. There are drawbacks, too, but for many eligible companies, this is a sound way to go.
Before we continue, I want to point out that the “C” in LLC is for “company,” not “corporation.” In fact, LLCs are specifically unincorporated associations, which give them a greater ability to alter their structure as needed for the good of their business.
The primary advantages to having an LLC are in terms of taxation. You can register the company with the IRS as a sole proprietor, partnership, S corporation, or C corporation, (Check-the-box taxation) always assuming that it would otherwise fit the criteria for such. That being the case, so long as it’s not registered as a C corporation, you have the availability of pass-through taxation, which basically means you don’t have to worry about being double taxed on the same income. Owners are called “members” and are taxed at the member level with this type of structure.
Even more importantly, however, is that members are protected from liability for acts and debts of the LLC. This means that if another member makes poor financial decisions that cause the LLC issues, you won’t necessarily be held responsible. In most states LLCs are considered separate legal entities from the individual members, leaving more direct responsibilities with individual partners in the company and alleviating a lot of the “rise together, fall together” mentality that has been so prevalent in the business world since the conception of business partners.
There are, of course, some disadvantages. For one, the structure is still reasonably new, so investors are less likely to back a system that they are unfamiliar with. Even worse, some will require that members agree to be personally liable for debt accumulated by the company, which of course misses part of the point of an LLC. Some people are unfamiliar with a company that doesn’t have to have officers like a corporation, and taxation jurisdictions outside of the US may tax the LLC as a corporation regardless if you’re operating there.
That being said, most of the disadvantages associated with LLCs are based in their unfamiliarity. That will be cleared up in time, but the potential advantages far outweigh those, as well as the advantages of being at the front of this.
So consider that your business might benefit from being an LLC. Not all companies will work best with this structure, however don’t be afraid of it because of unfamiliarity. It might be what you need to run the best, most efficient company that you can.
