Limited Liability Companies are recognized in all 50 states and the District of Columbia. In most states any type of business can form an LLC, though some state laws may require at least two members in order to form one.
Advantages of an LLC
- The members of an LLC have protection against liability. They cannot be held liable for company losses, or debts and business credit, and their personal assets (such as a house or car) cannot be recovered by the debtors.
- LLCs have the freedom of selecting any form of profit distribution, which does not have to be in the ratio of the ownership between different members.
- LLCs do not have a legal requirement to conduct formal meetings, maintain minutes of the meeting, or record resolutions.
- Benefits similar to a corporation are available without going through any incorporation formalities.
- Pass-through taxation principles apply and the company itself is not taxed unless it opts for being treated as a regular corporation. All business profits, losses, and expenses are accounted for by its individual members. Members have to show the earnings in their individual tax returns and accordingly pay taxes. This allows the avoidance of double taxation by way of corporate tax payment along with the individual income tax.
Disadvantages of an LLCWhile the advantages largely benefit most small businesses, certain aspects of an LLC can prove to be disadvantageous. This is especially true for larger organizations. Some of the disadvantages of an LLC are:
- LLCs have a limited life and are usually dissolved when a member dies, or if the company faces bankruptcy.
- LLCs cannot go public, as there are no shares or shareholdings. For the same reason, issuing shares to employees through stock options is not possible.
- Even though the paperwork and the complexities associated with LLCs are significantly less than those required for forming a corporation, its formation is still substantially more complex than a partnership or sole-proprietorship.