Limited Liability Company - Advantages / Disadvantages



An LLC combines
the concepts of partnerships for tax purposes
and corporations for liability purposes. LLCs
are created by filing ìArticles of Organizationî
with the Secretary of State. While similar, LLCs
are NOT corporations. In an LLC, the owners
are called members. The members may elect
or hire a manager(s) to run the business. As
in a corporation, the owner(s)/member(s) may
elect themselves to be the manager(s).

Advantages ó 

Members of an LLC are
protected from personal liability in the same
way as corporation shareholders, while the
entity itself can have the flexibility of a partnership.
The IRS has determined that LLCs
may elect to be treated as partnerships or
corporations for income tax purposes. A Colorado
LLC will be treated as a partnership if
there are two or more owners, unless the LLC
elects to be taxed as a corporation. However,
state law allows the formation of an LLC by
a single individual. In that case the IRS will
treat the LLC as a sole proprietorship. Because
LLCs are a new form of legal structure
and various questions remain unanswered, it
is recommended that you consult a knowledgeable
attorney if considering the formation
of an LLC.

Disadvantages ó 

LLCs are a recognized
legal structure in all states. However, tax and
liability treatment of an LLC is not uniform
across state lines. There may also be limitations
on the transferability of ownership in certain
situations. In that case the IRS may treat the
LLC as a sole proprietorship or partnership.

Benefits of A Limited Liability Company (LLC's)

The Limited Liability Company can enjoy the benefits of the corporate liability shield and its
owners can choose to be taxed as sole owners (the nature of a sole proprietorship) or as a
corporation or a partnership.

The LLC can be member-managed (if it is formed to be owned by members) or managermanaged.
Member-managed resembles a partnership and manager-managed resembles a
corporation.

A major advantage of the LLC is that profits can be passed through to the owners, resulting in
taxation only at the owner level (if the LLC elects not to be taxed as a corporation). An
advantage is that the owners need not report to a Board of Directors.

Advantages of A Limited Liability Company

Limited Liability.  Members are protected from personally liability for business decisions or actions of the LLC.  This means that if the LLC incurs debt or is sued, members are not required to satisfy the claims with their personal assets. This is similar to the liability protections afforded to shareholders of a corporation.  Keep in mind that limited liability means ìlimitedî liability - members are not necessarily shielded from their or their employees' tort actions, such as accidents.

Less Recordkeeping. An LLCís operational ease is one of its greatest advantages. Compared to an S-Corporation, there is less registration paperwork and there are smaller start-up costs.

Sharing of Profits. There are also fewer restrictions on profit-sharing within an LLC, as members distribute profits as they see fit. Members might contribute different proportions of capital and sweat-equity. Consequently, it's up to the members themselves to decide who has earned what percentage of the profits or losses.