Understanding the Benefits of Limited Liability Companies

May 1, 2024
Jennifer Nichols

Limited Liability Companies (LLCs) are possibly the most common type of corporate structure used in forming new businesses. This is because they are easy to set up, offer considerable flexibility, and provide numerous benefits. If you are considering launching a new business, a business formation lawyer can explain why you should consider forming an LLC.

Liability Protection

One of the most significant benefits of forming an LLC is that, as the name suggests, it limits your personal liability. In other words, forming an LLC creates a liability shield between you and your business. Forming an LLC prevents you from being held personally liable for any debts or obligations related to your business.

An example may help demonstrate how important this limitation of liability can be. A group of doctors decides to start a cardiology practice. In order to perform testing that they would otherwise have to refer to a lab, the doctors decided to purchase an expensive piece of medical equipment. Because the practice is new and the equipment is so expensive, they must finance the purchase over ten years. Unfortunately, the practice struggles and soon loses money. The practice then defaults on the loan payments and gets sued as a result.

If the practice was a general partnership, each of the doctors would be personally liable for the unpaid balance on the loan. If the practice was formed as an LLC, then the LLC would be liable for the loan, but not the individual doctors.

Pass-Through Taxation

One reason people fear creating a corporate entity is that they could pay taxes twice—once at the corporate level on income received by the entity and then again at the personal level on the income received by the owner. With an LLC, you can be taxed as a pass-through entity. This means that the LLC will not pay any taxes; instead, all taxes will be paid by the LLC owners at their personal income tax rate.  LLCs can also elect to be treated as an S-corporation, which is a particular type of pass-through entity.  Alternatively, LLCs can elect into C-corporation tax treatment, which may be preferred depending on circumstances.

Flexible Management Structure

Through their certificates of formation  and company agreements, LLCs can structure the management of their business however they choose. For example, the owners/members of the LLC can retain management control over the business or delegate management to designated managers who need not be owners/members of the business. This allows business owners to retain an interest in a business they started without necessarily having to be actively involved in its daily operations.

In addition, there is no requirement that LLCs hold annual meetings or document meetings or decisions, like there is with corporations, which makes the LLC structure easier to maintain for corporate governance purposes.

Considering Starting a Business? Contact J Nichols Law, PLLC Today

While the benefits we discussed above may make forming an LLC the obvious choice, it is important to emphasize that there are many other details unique to your business that you need to consider. Speaking with a business formation lawyer is the best way to ensure you create the structure best suited to your business goals. Call J Nichols Law at 409-257-7878 or contact us online to discuss how we can help you get started.