Forming a Limited Liability Company (LLC) has several important advantages. An LLC may be a sole proprietorship, meaning there is only one member, or it may have several LLC partners. Many people will choose this business form because of the limited LLC liability that it offers, as well as certain tax advantages. When people form a corporation, as opposed to an LLC, they will have to file income tax returns for both their personal income and the income of the corporation. Forming an LLC will avoid this "double taxation" problem.
The LLC partners, will include the profits and losses of the business within their own income tax returns. This basically means that the LLC itself will not be taxed. It is not subjected to federal corporate taxes. Taxes will only be removed once from the LLC partners, instead of having taxes removed from the members and the corporation. This is called pass-through taxation, and is one reason many people choose LLC formation over a corporation. An option called "check-the-box" taxation allows LLC partners to decide how they will be taxed.
The limited LLC liability aspect is one of the most important advantages of forming an LLC. Members will have limited liability within the company. This means that a member's liability is restricted to a set amount of money. LLC liability restricts the members from being responsible for the debts of the business. If an LLC is sued, for example, LLC liability allows the plaintiff to take action only against the profits of the company, not the members. LLC partners will generally loose only the amount of money that they have invested within the company if it goes into debt.
In addition to LLC liability, forming an LLC also allows more flexibility in ownership. If a person does not wish to share profits or ownership with any other members, he or she can form the company with only one owner. Also, an operating agreement will specify how much money is invested by the LLC partners, and what their rights and responsibilities are within the company. This will allow members to be as active or inactive within the business as they choose to be.
Most state laws do not require LLC partners to hold annual meetings. There is less formality involved, because there is generally no Board of Directors. There is also considerably less paperwork and record keeping involved with maintaining an LLC. This usually makes it easier and less time consuming for LLC partners.