Consider A Limited Liability Company For Your Small Business

A Limited Liability Company is often considered to be a type of business organization that has both the insulation from liability afforded by a corporation combined with the tax pass-through advantages of a partnership.

The LLC permits a business to operate more like a regular partnership. Income is distributed to partners who report it on their individual income tax returns, while at the same time those individuals are protected from personal liability for the business's debts, in pretty much the same way as a corporation does. In general, unless the business owner establishes a separate corporation, the owner and partners (if any) assume complete liability for all debts of the business.

The LLC may seem to afford the same advantages and disadvantages as the subchapter S corporations; but there are some subtle differences. A subchapter S corporation can issue only one class of the company stock; but an LLC can offer several different classes of stock with different rights. And while S corporations are limited to a maximum of 75 individual shareholders (and all of these shareholders must be U.S. residents) an LLC can have an unlimited number of individuals, corporations, and partnerships who are participants in the LLC.

Another benefit that the LLC has over the limited partnership is that it provides significantly greater tax advantages. In a limited partnership a partner’s are considered passive losses and cannot be used as tax deductions to offset active income unless the partner is active. And active partners become liable for the firm's debt. And even though the owners of an LLC do not assume liability for the business' debt, any losses the LLC incurs can be used by the owners as tax deductions against active income.

It is important to note, however, that there is a "transferability restriction test" with LLCs and their ownership cannot be transferred without restrictions. But while this restriction may be a fatal flaw for large business organizations that need to transfer stock to raise money (such as on a stock exchange) it should not be a major problem for small businesses that seldom transfer ownership interests.

Entrepreneur.com has a very informative article on LLCs.

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Here is what the IRS says about LLCs:

Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.

LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
“Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner.

A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.

For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to Publication 3402, Tax Issues for Limited Liability Companies (PDF).

You can read more at the IRS’s site.
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Here is an excerpt from Find Law on how to form an LLC:

How to Form an LLC

Limited liability companies (LLCs) are easier to create than corporations -- and forming one may be the best thing you can do for your business.

Forming an LLC (limited liability company) is not as hard as most people think. Here are the steps you need to take to make your LLC a legal reality.

1. Choose an available business name that complies with your state's LLC rules.
2. File formal paperwork, usually called articles of organization, and pay the filing fee (ranging from about $100 to $800, depending on your state's rules).
3. Create an LLC operating agreement, which sets out the rights and responsibilities of the LLC members.
4. Publish a notice of your intent to form an LLC (required in only a few states).
5. Obtain licenses and permits that may be required for your business.

To read the entire Find Law article on how to start an LLC, you can click here.


This article is to designed to point you towards resources that can help you consider whether you would like to form an LLC and if it would meet your needs. This article does not contain any legal advice and should not be construed as such. In order to get legal advice, the reader should consult with an attorney.