Limited Liability Company
A limited liability company (LLC) is a structure for private companies. From a legal standpoint, this entity combines aspects of partnerships and corporations. Limited liability companies comply with the same tax regime as partnerships and sole proprietorships, while maintaining the limited liability status of corporations.
The rules governing LLCs differ, however, the owners of the company are commonly referred to as members.
What are the advantages of an LLC?
- Flexibility
LLC can choose which tax regime to comply with. The possible tax regime options include:
- Sole proprietorships
- Partnerships
- S corporations
- C corporations
If the LLC selects on the proposed tax regimes (except the C corporation), it can be treated as a flow-through entity, so long as it does not choose to be treated as a C corporation. Due to the fact that the income of an LLC is treated as the income of its owners, it is possible to avoid double taxation. If double taxation were to be applied, income would be taxed both at the moment it would be accounted for as corporate income and at the moment it would be distributed in the form of dividends.
- Protection
The status of a legal liability company protects the stakeholders in the company, because it is treated as an autonomous entity. As a result of this clause, the members and owners of the business don’t have to be held personally accountable for the profitability of the business, as they have no personal stake in it.
What are the disadvantages of an LLC?
- Fees and taxes
While owners of a limited liability company can avoid double taxation, they are still required to pay self-employment taxes. This has to take place because in LLCs the owner is both the employer and the employee. The company may also incur an annual fee for the limited liability benefits that LLCs provide their members. In literature, people tend to refer to this payment as the ‘franchise tax’.
- Regulation
LLC regulation depends on the country. In the US, for instance, LLCs are always governed by state law, for this reason companies need to navigate a highly nuanced environment. There are countless details that differ greatly from one state to the next. This refers to the procedure upon a member’s death, the dissolution of the company and member rights among other things.
