Limited liability companies, often referred to as "LLCs," have been around since 1977, but their popularity among small-business owners is a relatively recent phenomenon.
An LLC is a hybrid entity, bringing together some of the best features of partnerships and corporations. "An LLC is a much better entity for tax purposes than any other entity,'' says Ralph Anderson, a CPA and small-business tax specialist with accounting firm M. R. Weiser. LLCs were created to provide business owners with the liability protection that corporations enjoy without the double taxation. Earnings and losses pass through to the owners and are included on their personal tax returns.
Sound similar to an S corporation? It is, except an LLC offers small-business owners even more attractions than an S corporation. For example, there is no limitation on the number of shareholders an LLC can have, unlike an S corporation, which has a limit of 75. In addition, any member or owner of the LLC is allowed a full participatory role in the business's operation; in a limited partnership, on the other hand, partners are not permitted any say in the operation. To set up an LLC, you must file articles of organization with the secretary of state in the state where you intend to do business. Some states also require you to file an operating agreement, which is similar to a partnership agreement.
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Like partnerships, LLCs do not have perpetual life. Some state statutes stipulate that the company must dissolve after 30 or 40 years. Technically, the company dissolves when a member dies, quits or retires.
Despite the attractions, LLCs also have their disadvantages. Since an LLC is relatively new, its tax treatment varies by state. If you plan to operate in several states, you must determine how a state will treat an LLC formed in another state. If you decide on an LLC structure, be sure to use the services of an experienced accountant who is familiar with the various rules and regulations of LLCs.
Even after you settle on a business structure, remember that the circumstances that make one type of business organization favorable are always subject to changes in the laws. It makes sense to reassess your form of business from time to time to make sure you are using the one that provides the most benefits.
From Start Your Own Business: The Only Start-Up Book You'll Ever Need, by Rieva Lesonsky and the staff of Entrepreneur Magazine (Entrepreneur Press)