Benefits of Forming a Limited Liability Company

By Eric Misterovich

Limited liability companies, or LLCs, are the most modern form of business entity. Consequently, LLCs provide their members with several benefits that are not found in older business entity forms, such as corporations or partnerships. These benefits include:

  1. Limited liability, which protects the personal assets, such as a personal bank account or house, of the LLC member;
  2. Pass-through taxation, which passes all profits and losses through to the individual member’s personal income tax returns;
  3. The ability to obtain a state tax ID or federal employment identification number (FEIN), which are often required to open a business bank account or to contract with their parties, such as vendors and distributors;
  4. Fewer corporate formalities, such as yearly meetings, meeting minutes, and annual requirements imposed by the state;
  5. An almost unlimited ability to creatively structure the operation of business, whether by managers or members; and
  6. Fewer restrictions on number of members.

LLCs may have some disadvantages, however. Venture capitalists and other investors often favor corporations over LLCs so that they can easily obtain preferred stock. Depending on the state, filing for an LLC may also be expensive. California requires that all LLCs pay a yearly franchise tax of at least $800, while Illinois charges $500 to file an LLC’s Articles of Organization with the state. Finally, unlike corporate case law, which has been gradually evolving over the years, there is less case law precedent concerning LLC’s, which may create uncertainty depending on the facts of the dispute.

Overall, LLCs are typically the favored entity for a small business or startup. If would like to know what form of business entity is right for you, contact one of our expert attorneys today.

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