Deciding how to structure a company is an important process for any small business owner. Recently, many small business owners are choosing to form a Limited Liability Corporation (LLC). Both Corporations and LLCs protect their owners from liability, but LLCs are more flexible. LLCs combine most of tax benefits of a partnership, and the legal protections afforded to corporations.
Perhaps the most attractive attribute of an LLC is its flexibility relating to taxes. LLC’s are granted “pass-through taxation” by the IRS, referring to the fact that taxes are calculated from the profits of the owners (termed “members”), not the profits of the LLC. This avoids the burden of “double taxation” faced by corporations, which are taxed at both levels. LLCs also have the benefit of "check-the-box" taxation, allowing LLCs to determine whether to be taxed as a partnership, sole proprietorship, S-Corporation or C-Corporation.
Comparable Liability Protection
LLCs have comparable liability protection to that of other corporations. LLCs enjoy limited liability, which means that LLCs’ members are protected from corporate debts and liability. Make sure to research state laws regarding corporate liability protection, often termed “shield laws."
LLCs enjoy significantly less paperwork than other corporations. LLCs are spared from filing tedious forms, such as year-end minutes and notifications of shareholders meetings. Again, check state law to confirm. There are also fewer restrictions regarding shareholder eligibility, and most LLCs tend to be run less formally than corporations.
Easier Single Ownership
Unless a formal agreement organizes centralized power through a board, management won’t necessarily be concentrated within a board of directors, as would be the case within other corporate entities. In most states, LLCs can be created with as few as one person involved, and may be the best business entity for individual small business owners.
As always, it’s important to weigh the benefits of Corporations and LLCs before making your choice. If you’re planning on going public with your company, it may be best to incorporate, because switching will add cost to your Initial Public Offering down the road. However, if you are interested in having the liability coverage of a corporation with more administrative and fiscal flexibility, an LLC could be the right option.