What are the Advantages of an LLC?
LLCs offer numerous advantages.
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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.
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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.
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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:
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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.
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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.
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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.
