A Limited Liability Company is similar in many ways to an S-Corporation but is more flexible and faces fewer rules and regulations. Each LLC member (co-owner) pays income taxes on their share of the LLC’s profits at their own individual tax rate. For this reason a LLC is known as a “pass through entity.”
LLCs must file an operating agreement with the Secretary of State of their home state. The operating agreement outlines the management and guidelines of the entity and governs raising capital and transferring and selling of shares, among other details. Requirements vary from state to state.
There are no shares of stock in a LLC; the entity issues member (ownership) units or interests. However, LLC owners have the same advantage of limited personal liability for company debts as with a C-Corp. If the LLC is sued, only business assets (not members’ personal assets) are at risk.
Primary advantages of the LLC:
Limited personal liability for the LLCs debts; No taxation at the corporate level. The LLC passes through income and losses to the LLC members who report their share of the LLC’s profits and losses on their personal tax eturns, enabling them to offset losses from other LLCs; LLCs are not typically limited in the number of members the entity can have; LLCs are less formal and easier to manage and require less paperwork and administrative duties than the S-Corp. and C-Corp; Flexibility in company structure and management – self-governing operating agreement.
Primary disadvantages of the LLC:
Harder to transfer ownership than with an S-Corporation or C-Corporation; As the newest business structure, there are fewer laws governing the LLC’s management, operation and maintenance; and fewer established precedents exist;