A limited liability company, commonly known as an LLC, is a business entity that provides two important benefits to its owners: pass-through taxation and limited liability.
Benefit 1: Pass-Through Taxation
On a corporation, the federal government imposes taxes both at the business level and on any profits or income paid to the corporation’s owner. As a a result, the shareholder of a corporation is taxed twice, a concept called double taxation.
By comparison, LLC owners report their business profits or losses only on their personal income tax returns. With this pass-through taxation, the LLC owner is only taxed once, just like the owners of a sole proprietorship or partnership.
Benefit 2: Limited Liability
Like owners of a corporation, an LLC owner is protected from personal liability for business debts and claims. This feature is known as limited liability. What does this mean? If the LLC owes money or faces a lawsuit, the creditor or plaintiff can only go after the assets of the LLC itself. They usually cannot go after the personal assets of the LLC owner, such as a house or car.
Corporation vs. LLC
As compared to a corporation, which must adhere to many formalities to keep its corporate structure, states impose less stringent requirements for the formation and management of an LLC. This, coupled with the benefits mentioned above, makes the LLC very attractive to small business owners.
If you have questions about LLCs or entity formation, contact us here.
