A Limited Liability Company (LLC) is a private business entity that combines elements of a sole proprietorship (in a single member LLC) or partnership (in a multiple member LLC) with the limited personal liability (sometimes called ‘corporate veil’) of a corporation.
Liability:
Because an LLC is considered an entity separate from the individual organizers, most jurisdictions will not hold members of an LLC individually responsible for debts incurred by the LLC itself.
Taxation:
One of the primary benefits of an LLC is that it effectively allows its members to avoid double taxation. That is, the income of the LLC is typically ‘passed-through’ to the members individually. With a C corporation, alternatively, income is taxed at a corporate tax rate, then officers would also pay income taxes on their wages.
Uniquely, an LLC allows its members to select from the full range of tax treatment options. Many LLC’s simply pass through income to a Schedule C of individually members’ income tax returns. Others can file IRS Form 8832 and elect treatment as a C corporation or S corporation.
Pros:
- Business can be managed by a non-officer
- Limited individual liability
- No required annual meetings or complex operating bylaws
- Option for single owner or multiple owner companies
- ‘Pass-through’ taxation by default, allows for alternative taxation options
Cons:
- Filing fees may be higher, with some States charging a privilege tax/fee for this entity type
- Lack of default hierarchy for officer titles can lead to confusion in determining who qualifies as an owner or manager
- Most State statutes are open-ended and do not provide detailed rules of governance, leading to difficulty raising capital from investors and potential risk in court proceedings