You do not need to form a limited liability company to start a business. A business can begin as a corporation, partnership or sole proprietorship as well. However, forming an LLC can offer benefits and advantages not available with other business entities. LLCs have flexibility in areas such as taxation and management, and they have few if any ownership restrictions.
Significance
An LLC is a hybrid business that combines the limited liability protection of a corporation with the operational simplicity of a partnership. With an LLC, you can form the business by yourself or add any number of members to the company's ownership structure. If you form an LLC, you can offer a membership interest to other LLCs, corporations and partnerships. If you operate as a sole proprietor or a partnership, corporations, LLCs and partnerships cannot have a membership interest in the business. Also, LLCs have greater capital-raising potential compared with a partnership and a sole proprietorship.
Liability
Forming and operating your business as an LLC protects you personally from the company's obligations. In other words, if the LLC gets sued and loses, the judgment does not affect your home, car and other personal valuables. If you choose to form a sole proprietorship or a partnership, you have a personal responsibility to cover all company debts and liabilities. If you form an LLC, you are not personally liable for the negligent acts of another member. This does not hold true in a partnership, where you may lose your home and other personal assets due to another partner's error, omission or negligent behavior. While you do not have to form an LLC to start a business, the limited liability protection granted to members of the business makes LLC formation a smart option.
Flexibility
With an LLC, you have great flexibility in terms of taxation and operating the business. You can choose to get taxed like a sole proprietorship, partnership or a corporation. An LLC's members get to pass their share of company profits and losses directly to their personal income tax return. LLCs do not pay tax on the company's net income as a business entity. In addition to taxation flexibility, you have the ability to choose your level of involvement in terms of managing the company's day-to-day business affairs. You can run the business like a partnership or a sole proprietorship, where you heavily involve yourself in the company's day-to-day decisions. On the other hand, you may choose to run the company more like a corporation, where you have less involvement in the company's daily affairs. In this scenario, you can hire nonmember managers to oversee the LLC's day-to-day activities.
Considerations
When you operate an LLC, you and the company's members have the power to divide company profits and losses in any manner, regardless of a member's contribution to the business. Operating an LLC means you need to create a written operating agreement that details the company's management and financial information. A well-written operating agreement helps the members and managers of the business avoid disputes, and it protects the LLC's limited liability status. As an LLC, your business takes on a life of its own, since the company can exist as long as the members of the business agree to keep it going. LLCs can have an unlimited life, which means the company will exist regardless of management and membership changes.
