What Are the Benefits of Setting Up an LLC?
A limited liability company, or LLC, is a business entity that provides owners with significant asset protection and potentially advantageous tax benefits. Like corporations, they are legal entities with a separate legal identity from that of their owners. A limited liability company can hire and fire employees and enter contracts independently of the company owners. Owners of LLCs also have the option to choose whether to file taxes as a corporation or as a pass-through entity by accounting for profits and losses on their personal tax returns.
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Asset Protection
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The chief benefit of forming an LLC, as opposed to a general partnership or sole proprietorship, is the asset protection it provides to company owners. Under normal circumstances, owners of LLCs are not liable for the debts incurred by the company. This means that an owner cannot be personally wiped out by a claim against a company employee or a partner.
Asset Protection
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If someone sues an owner of an LLC and wins a judgment, the LLC owner has certain advantages over the owner of a corporation: Since LLCs do not issue shares, per se, someone awarded a fractional interest in an LLC does not have access to the company's books -- only a right to a percentage of the income the owner is able to take from the company in the form of dividends. That occurs if the judge grants the plaintiff, or creditor, the right to a future share of income from the LLC in what is called a "charging order." Furthermore, if the LLC owner does not elect to take dividends, the creditor may be held liable for income tax on profits accruing within the company. This can occur even though the creditor derives no benefit, since the controlling partner does not pull any money out of the LLC to distribute to owners. This can be a deterrent to lawsuits or an incentive to settle on terms more favorable to the LLC owners. This idea does not work with single-member LLCs, however.
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Simplicity
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LLCs are typically easier and less expensive to set up and run than corporations. You simply need to file articles of organization with your state secretary's office, or the business or corporate services office in the state in which you intend to do business.
Taxation
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LLC owners can elect tax treatment as a pass-through entity. This means that the company does not file its own return, but profits and losses are accounted for on the owners' individual tax returns. This helps LLC owners avoid the double taxation of some corporate dividends.
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