LLC Advantages

Limited Liability

One of the major reasons why business owners will form a LLC is the limited liability protection that it affords to its owners. Business owners who operate as a sole proprietor will have no separation from the business and the individual. Therefore, in the event of a lawsuit, the owners will be vulnerable for the debts and obligations of the company. Whereas a LLC does provide the separation between the LLC and the owners and the only assets vulnerable to a lawsuit is the business assets. The personal assets of the business owners are protected.

It is important that you maintain this separation between the LLC and the owners. You must have separate bank accounts and you may not use personal assets to pay off business debts and vice versa. Doing this may make your personal assets vulnerable to a lawsuit.

Pass through taxation

Another great benefit for a LLC is that it has “pass through taxation”. What this means is that the LLC in essence doesn’t pay a tax. All the profits that the LLC generates will “pass through” the LLC and be reported on the individual income of the owners. The LLC is great since the LLC doesn’t pay a corporate tax unlike a Corporation. Corporation’s suffers from double taxation thus the popularity of LLC’s. There is no special filing to obtain this pass through taxation. It is inherent into the LLC. To get pass through taxation for a corporation, there is an additional filing with the IRS to mimic the same tax structure.

Ownership requirements

All states allow an LLC to be formed by one or more people. The Secretary of state does not check into any credit history or legal residency of the members forming the LLC. Although the state does not check any legal residency, you may need a valid social security number to obtain a federal tax ID number. Owners are required to maintain good standing for your LLC by paying any state yearly maintenance fees if applicable. Also, the owners must have on record a valid operating agreement for the LLC.

Transfer of Ownership

The sale of members interest is subject to securities laws. There is no provision with the Secretary of State to transfer ownership. Transfer of ownership of the business may be more complicated than simple paperwork. If you are planning to sell your LLC we suggest that you consult with an attorney. It may not be enough to change information about the LLC with the Secretary of State. (Note: There are exceptions for owners who do not advertise the sale and the sale is to a small number of sophisticated investors.)

Distribution of Income

Unlike the Corporation, an LLC may decide on the method for distributing income to its owners. A corporation is required to distribute based on ownership percentages. In contrast an LLC may decide to split up its income however it chooses, and it is not required to follow ownership percentages. This gives the LLC a lot of flexibility when dealing with the finances of the LLC. Also, since the LLC has pass through taxation, it also adds another element of ease when dealing with income. We always to recommend that you consult with an accountant regarding any income or tax related questions.

Management

The management of the LLC can be accomplished in two separate ways. There is a member managed LLC and a manager managed LLC. The difference between the two is who will carry out the day to day operations of the LLC. In a member managed LLC, the owners (who are the members) will run the LLC. The members will have direct control of the LLC as they see fit. In a manager managed LLC, the members of the LLC will designate a third party to make the day to day decisions for the LLC. The members will therefore not give any input. Most often, the LLC will be managed by a member managed LLC. Many owners will not allow for a third party to run their business.