A limited liability company (LLC), like a corporation, is a legal entity existing separately from its owners. A limited liability company is not a partnership or a corporation, but it combines the corporate advantages of limited liability with (normally) the partnership advantage of “pass-through” taxation.  However, the laws regarding limited liability companies remain unsettled. With unsettled laws, doing business as a limited liability company entails additional uncertainty. Because of this, with the readily available S corporation option, we highly recommend forming an S Corporation over a limited liability company for those who can meet the S Corporation requirements.

The advantages of an LLC are numerous.  The LLC combines the flexibility found in a sole proprietorship or partnership and the limited liability of the corporation.  Moreover, unlike a limited partnership or corporation that require a great number forms to be filed, the formation of an LLC is much simpler. 

The other benefit of an LLC is found in the area of taxation.  An important aspect of the LLC is that the LLC can choose how it wants to be taxed – as a sole proprietorship, C Corporation, S Corporation, or partnership.  This becomes significant because it allows the LLC to avoid “double taxation” that corporations face and is able to choose the “pass through” taxation that exists for sole proprietorships and partnerships.  The LLC has a benefit over the S Corporation in that there is no limit to the number of the number of shareholders in an LLC; the maximum number of shareholders for an S Corporation is 100.

An LLC can be managed two separate ways – “member management” and “manager management.”  In the “member management” system all the members of the LLC have a say in the operations of the LLC and they are the managers.  In the “manager management” method, the members appoint one person as the manager, who takes care of the operations and decisions of the LLC, while the others do not.  These methods are different from that of a corporation, in which the shareholders elect a board of directors, who in turn appoint executives to run the corporation. 

There do exist certain disadvantages to the LLC.  States such as New York and Texas have placed a “franchise tax” or “capital values tax” on LLCs.  These states have implemented this tax as a “fee” on the LLC for the limited liability that they enjoy.  Many factors may determine how this tax will be assessed, including revenue, profits, number of owners, or amount of capital employed. 
Another disadvantage to the LLC is that if an operating agreement does not exist, problems can arise similar to the ones that can arise in a partnership.  Furthermore, like a sole proprietorships and partnerships, the life span of an LLC can be very short, often terminating with the death of one of the owners.

For other information about Business Entities, please click on one of the following topics below:
Description
Sole Proprietorships
General Partnerships
Limited Partnership
C Corporations
S Corporations
Limited Liability Companies
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