The Advantages and Disadvantages of Limited Liability Company (LLC)

Limited Liability Company (LLC) is a business structure that provides many advantages to its members such as:

• Tax advantages. The taxes are acquired on each member's tax returns and there is no requirement to pay additional corporate taxes unlike in some business structures. Also, members are not required to pay federal corporate taxes which are compulsory in some business arrangements.

• There are few legal requirements. According to lawyers, LLC structure requires no director meetings, annual meetings, or other corporate formalities.

• More flexibility. Members can create their own contract that will state their responsibilities and the company's management structure.

• In distributing income to members, LLC provides various types of interests unlike in S corporation where it can only issue one type of stock.

• There is no restriction in the number of LLC members. Also, most states, including California, allow single-member LLC.

• LLC can use cash method of accounting which means that incomes are not counted until cash is received. This method is simpler than accrual system (used by corporation) which requires that every transaction, even if the cash has not been received, is considered as part the income.

• LLC members can protect their personal asset (limited liability). When the company is facing lawsuit or bankruptcy, each member's personal asset is protected from liquidation which means that the government cannot freeze or takeover these to pay for the company's debts and liabilities.

• LLC members can hire anyone, even non-members, to manage the company.

• LLC can merge with other business (unlike in S corporation).

• LLC members can split losses and earnings any way they want, unlike in S corporation where the amount of dividends are given according to the shares percentage of each member.

While LLC has some benefits, this business structure also has its disadvantages:

• All earnings will be subjected to self-employment taxes.

• Some states require LLC to pay annual operation fee, income taxes, and/or franchise taxes.

• Some states limit the time a company can be an LLC.

• Because LLC is a relatively new business structure (introduced in 1996), owners are still having a hard time to resolve legal disputes.

• Banks, insurance companies, and some types of businesses are not allowed to become LLC.

Choosing the best business structure

There are six basic business structures such as the sole proprietorship, general partnership, limited partnership, limited liability company (LLC), C corporation, and S corporation. According to lawyers, each of these structures has its own advantages and disadvantages so it is very important for businessmen to consider all the ramifications.

Meanwhile, it is also important for company owners to hire lawyers specializing in commercial law when making contracts to avoid any legal dispute.



Our skilled business lawyers are experienced in handling business cases involving limited liability company establishment. For consultation, visit our website and call our toll free number.