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Should I Form an LLC?


Advantages and Disadvantages of the LLC Business Entity


By BizFilings
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Related Info:
Should I Incorporate?
LLC FAQs
Where Should I Incorporate My Business?
LLC or S-Corp: How to Choose the Right Business Entity for Me
More Articles > Business Basics > Business Law



What are the Advantages of an LLC?

LLCs offer numerous advantages.

  • Pass-Through Taxation
    LLCs allow for pass-through taxation. This means that earnings of an LLC are taxed only once. The earnings of an LLC are treated like the earnings from a partnership, sole proprietorships and most S corporations.
  • Limited Liability
    The LLC owner's liability is generally limited to the amount of money which the person has invested in the LLC. Thus, LLC members are offered the same limited liability protection as a corporation's shareholders.
  • Flexible Management Structure and Flexible Ownership is Permitted
    Like general partnerships, LLCs are generally free to establish any organizational structure agreed on by the members. Thus, profit interests may be separated from voting interests.

What are the Disadvantages of an LLC?

The disadvantages of an LLC include:

  • More Paperwork Than an Ordinary Partnership
    Documents must be filed at the state level to create an LLC, which is not the case with a general partnership.
  • Dissolution Date
    Some states require that a dissolution date be listed in the articles of organization. This date may be amended. Further, certain events, such as death of a member, a member leaving, bankruptcy, etc. can be a dissolution event. A corporation has unlimited life and these events are not dissolution events for a corporation.
  • Newer Entity Type
    The LLC is a newer entity, and people are not as familiar with the LLC as a corporation.

Should I Choose an LLC or an S Corporation?

While the S corporation's special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners.

An LLC may offer several classes of membership interests while an S corporation may only have one class of stock.

Any number of individuals or entities may own interests in an LLC. However, ownership interest in an S corporation is limited to no more than 75 shareholders. Also, S corporations cannot be owned by C corporations, other S corporations, many trusts, LLCs, partnerships, or nonresident aliens. Also, LLCs are allowed to have subsidiaries without restriction.

To learn more about the similarities and differences of S corporations and LLCs, click here. For advice regarding which entity is best for your particular situation, please contact an attorney or accountant.


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BizFilings  
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© Copyright 1996-2004, BizFilings
The information contained in this article is provided for general information only and should not serve as a substitute for legal advice from an attorney familiar with the facts and circumstances of your specific situation. BizFilings performs business formation services; it is not a law firm and does not provide legal advice or legal services.



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