Last week we looked at the oldest of good entities, the corporation. This week, let’s look at the LLC, an entity that just arrived on the scene within the last few decades, but is an excellent option in many situations.
The LLC (or Limited Liability Company) is a newer entity that combines the flow-through taxation of a partnership with the limited liability aspects of a corporation. Like an S corporation, LLCs offer flow-through taxation. They also offer superior asset protection benefits.
LLCs are chartered with the state and thus provide limited liability to the owners (known as “members”). Like a corporation, members are protected from personal liability for business debts or legal claims against the business (unless, as with any other entity, they sign a personal guarantee). And, as in a corporate structure, members must remember to sign contracts and obligations as members of the company rather than putting themselves at risk by signing individually.
LLCs allow for flexible management. Either the members (owners) or the managers (the president, etc.) can run the company. They also offer flexibility in division of profits and losses. In a corporation dividends are allocated according to percentage ownership. In an LLC, members can utilize special allocations to divide profits between members. So, for example, profits in an LLC owned 50/50 can be allocated on a 70/30 basis.
For more information on good entity choices and what will work best for your individual needs, read my book Run Your Own Corporation.