Limited liability companies have a lot to offer business owners, especially those just starting out. This classification of business is like an entry point, a way for them to protect the business and its owners as it works it way up to profitability. As such, LLCs offer a variety of services that benefit these owners, who are referred to as members.
Limited liability companies are especially popular because the services they offer take all the positive aspects of corporations or partnerships with few of the drawbacks. The federal government does not officially recognize LLC as its own tax designation, which is what allows members to pay taxes only through personal income taxes. It is this flexibility that has made the LLC grow in popularity in recent years. Wary of the effects of the economy, business owners flocked to the LLC during the recession of the late 2000s, to the point that it grew 12 percent between 2008 and 2009.
One of the most important services limited liability companies provide is the ability to avoid personal liability for negative actions that can occur. Members are not on the hook personally if the company is sued, or even if it has to go into bankruptcy. For this reason the LLC is a popular designation for businesses that are not well established and still at risk of negative outcomes. There are some disadvantages with choosing limited liability company, as it is much harder to find private capital to invest and the LLC is unable to go public for more money, but the benefits and services members do receive is often well worth the trade-off. It is common for businesses to start out as LLCs to take advantage of the services and benefits they offer, and once they have gained a stronger footing and are ready to seek out capital to expand they change to a S corporation or C corporation.
Another service offered to members of a limited liability company is the ability to pay taxes only once on the profits. While corporations must pay federal and state taxes on their profits before it is even taken by owners as income, the members of a limited liability company must pay only once. They take the profit as personal income, so they only taxes they need to pay are on their personal income taxes. This also means they can write off any losses. Limited liability companies also allow members to determine how the profit will be split up and how much goes to each individual member, whereas there is less flexibility in a partnership.
Limited liability companies are also free from the regulations that corporations face. While corporations are required to hold regular meetings, and are sometimes restricted in who can form them, LLCs are free of these shackles. They are not required to hold any meetings—though business experts suggest that they do at least quarterly to discuss major projects and the company’s direction—and are open to include a range of members. An LLC can be started by a person or group of people, a foreign entity and even another LLC or a corporation. Starting an LLC is also easier than many other forms of business, requiring just a simple form with the name of the company and names of the members and a nominal fee. While members are not required to add parts of the business layout or procedures for things like dissolving it, experts suggest that LLC members take these steps anyway. Without written procedures on how to carry out certain procedures, the LLC can default to the standard state regulations.
For all the services LLCs offer their members, there are some drawbacks too. The idea of a limited liability company is still new to the United States, with only a few decades of operation. Though this type of business actually started more than 120 years ago in Germany, it was slow to make it to the United States, and not until it was officially authorized by the state of Wyoming in the 1970s did it come in its modern form. As a result there are few court cases establishing precedence for legal issues or regulations, and these are subject to change. Because of this uncertainty business experts that LLC members consult with an attorney at some point.
More information about forming LLCs or the forms required can be found at LLC.org.