Why Choose a Limited Liability Corporation?
Choosing a business structure is one of the most significant decisions confronting new business owners. Depending on the type and size of the business, there are managerial, tax and competitive advantages to incorporating as a limited liability corporation (LLC).
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Liability
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Protecting personal assets is one of the most popular reasons for choosing to form a limited liability corporation. In the past, owners of a company had to incorporate under different business structures that primarily accommodated the needs of larger businesses. A limited liability corporation protects personal assets against any legal claims and judgments filed against the business.
Taxes
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Sole proprietorships offer certain tax advantages. For example, an owner has the ability to take income out of the company as a profit distribution. In addition, if the LLC has only one owner or member, that member can elect to have the LLC taxed as a sole proprietorship. This pass-through of income will be taxed at the owner's marginal tax rate, which may be lower than the corporate tax rate. Likewise, any potential losses the business incurs can pass through to the owner, as well. These losses can offset the owner's other sources of income, potentially lowering tax liability.
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Flexibility
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Forming a limited liability corporation provides members with flexible management options. For instance, when an LLC has more than one member, the member can choose to have the profits of the LLC taxed as a partnership, as an S corporation or as a C corporation. An S corporation is a domestic company with less than 100 shareholders, whose income from the business passes directly to each shareholder, who then pays federal personal income tax for this income. A C Corporation is a business with more than 100 shareholders and exists as a separate legal entity. As a result, federal income tax is assessed on the corporation directly. In addition, shareholders are liable for federal personal income tax on dividends received by the business. In contrast, the members of the LLC can share profits or distribute losses in any manner members wish. However, profits and losses do not have to be distributed evenly among LLC members. Other businesses, such as a corporation or partnership, can be a member of an LLC. Finally, an LLC can have as many members as necessary; a corporation is limited in this way.
Ownership
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Ownership of a limited liability corporation is vested in either one or a group of individuals. However, ownership is generally limited to a small group of owners, called members. Unlike an S or C corporation, an LLC does not have stock holders. In addition, forming a limited liability extends ownership rights to foreigners. This distinctive feature allows a nonresident alien to own or be a partial owner of a limited liability corporation. In contrast, only U.S. citizens or resident aliens can own S corporations.
Management
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A limited liability corporation is simple to form and manage. Unlike an S or C corporation, the LLC is not required to hold board of directors meetings, record minutes or issue annual reports. This is because an LLC is formed by its members and not by shareholders.
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