The main reason for using one is to create an independent and separate vehicle to run and conduct activity.  This separation from the owners of the limited liability company creates a layer of personal liability protection for the owners.  For example, if you start and run a business without a legal entity such as an LLC, you are completely and fully personally liable for anything related to your business.  This is because a business run this way (known as a sole proprietorship), is a part of you as a person.

By forming an LLC, you create a separate house to be the operator of the business.  This kind of entity is similar to a corporation when it comes to personal asset protection, but it is more suitable for the smaller business enterprise because it is a much simpler entity to create, maintain and manage.  In addition, it is a much more flexible entity than the corporation precisely because it was created to offer the benefits of a corporation without the disadvantages.  The LLC laws allow the owners to structure the ownership, management, and operation of the entity in a way that meets the needs of that particular business.  There are very little required formalities and requirements in the LLC laws.

Some people mistakenly refer to this entity as a limited liability corporation but it is not an incorporated entity at all.  The label of incorporated or unincorporated does not matter practically because you get the same level of protection.

Another advantage of a limited liability company is tax related.  With a corporation, profits are subject to double taxation and often you cannot take advantage of business loses immediately.  The LLC offers automatic and unqualified pass through taxation (also known as a single layer of taxation) and this results in less taxes and the ability to pass through losses that can be leveraged by the owners of the business to offset other income in many circumstances.  Check with your accountant for specific details.

Finally, the state legislatures of almost all 50 states are committed to continually improving the limited liability company laws to address any limitations or challenges that are faced as more and more people use it.  This has resulted in creating an even more perfect entity for small business.

As a result, the limited liability company has far outpaced the corporation when it comes to small business.  This is because it is ideal for many uses when it comes to running a private business, a joint venture, estate planning, asset protection strategies, real estate and self employment/consulting.

Compared to corporations and partnerships, the limited liability company is a much newer entity.  Wyoming was the first state to enact the laws to create the first kind of LLC back in 1977. Other states slowly followed but it was not until the IRS enacted regulations in 1997 to provide the limited liability company with tax choice flexibility that he LLC really took off.

The fact that the limited liability company is a relatively new entity is actually a good thing because it is a result of creating a best of breed legal vehicle.  The limited liability company has all the advantages of the two other main legal entities: the corporation and the partnership but without the disadvantages of those same entities.

A corporation’s biggest advantage is limited liability protection for all owners.  Some disadvantages of a corporation include more legally required meetings and formalities, less flexibly statutorily mandated management structures, double taxation, and higher maintenance costs in some states.

The limited liability company affords its owners the same solid limited liability protection as corporations but with much less formalities and other requirements and more choices when it comes to taxation including the default tax classification for an LLC which is pass through taxation (a single layer of taxation).  In addition, the limited liability company can alter its management and ownership structure in many more ways than a corporation can.  This allows for a wider variety of business planning if need be for the business and a lot more flexibility in determining how to best operate and manage the LLC business.

The partnership entity’s biggest disadvantage is that with a general partnership, all owners are personally liable for the obligations of the partnership and with a limited partnership at least one partner is liable.  On the other hand, the partnership entity does provide a lot of flexibility in how the partnership is structure and operated as well as the ownership relationships among partners.

The limited liability company provides the same governance, ownership and operational flexibility as a partnership but also grants limited liability protection for ALL owners.

I will write more about the specific differences in the legal entities in other posts but just know that the LLC is designed to give owners the best of both worlds.

The formation of limited liability companies each year has now surpassed corporations being incorporated – this is a sign that the LLC really is a preferred vehicle for private businesses, real estate, joint ventures, and estate or family planning.