Choosing to Form an LLC Over a Corporation

What is a Limited Liability Company (LLC) and is it a better form for your business than a corporation?

by Anne Lane

What is a Limited Liability Company (LLC) and is it a better form for your business than a corporation? LLCs generally have all the benefits of a corporation when it comes to limiting the business owner’s liability.  The advantage of an LLC is the management flexibility it allows, and the potential tax benefits.

LLCs allow a business to have the limited personal liability of a corporation as provided by state law, while being treated as a partnership for purposes of Federal tax laws. The downside to an LLC is that you don't get the free transferability of ownership, perpetual existence, and the ability to be totally owned by a single individual that you'€™d get with a Corporation.  That is the trade off you make to get the Partnership tax status and greater management flexibility.

If the company's business plan includes raising capital by someday admitting new owners or going public, then a Corporation is probably the more desirable form for the business. Limited Liability Companies generally restrict the transfer of ownership interests in the business to make sure the business is classified as a Partnership under federal tax law. An LLC usually has a limited existence in that it will end after a specified number of years or upon the occurrence of some specified event.  This requirement is intended to help the business qualify as a Partnership for purposes of tax law.

Being taxed as a Partnership or Limited Partnership makes the LLC structure particularly attractive because it gives the owners a great deal of flexibility in allocating profit and loss. Operating as a Limited Liability Company also gives the owners greater flexibility in determining who manages the business and what each owner's particular duties are in that regard.

Determining whether any particular business would benefit from being structured as a Corporation or a Limited Liability Company is a complex decision.  A lawyer who practices business law can help you determine what the possible consequences of each structure would be for your business.

 

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