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What is an LLC, and what are its advantages and disadvantages?

A limited liability company is a hybrid business structure. It provides its members with limited liability similar to a corporation with tax benefits similar to a partnership. Unlike a corporation, profit and loss from the business flows through to the personal tax returns of the members. An LLC can have one individual member, two members or can have other corporations and LLCs as members.

One advantage to structuring a business as an LLC is the ability to choose how the business is taxed. It may be possible to be taxed as a sole proprietor, a partnership or a corporation. By filing Form 2553, an LLC can be treated like an s-corporation when it comes to paying taxes. Other advantages to running a business as an LLC is that there is less paperwork and profits can generally be split as the members see fit.

There are a couple of disadvantages to running a business as an LLC. For example, LLCs have a limited lifespan and may be dissolved if a member leaves. However, it may be possible to extend the lifespan of the LLC by writing provisions into the company's operating agreement. Another disadvantage may be that the members have to pay self-employment taxes depending on how it chooses to be taxed.

Before deciding how to structure a business, it may be worthwhile to contact a business law attorney. An attorney may be able to review documents or help a business owner meet any state registration requirements that may exist. Those who are part of an LLC may wish to retain legal counsel to lower the odds of becoming involved in a dispute with another entity. None of the information provided in this article should be taken as legal advice because each case is different.

Source: United States Small Business Administration, "Limited Liability Company", October 24, 2014

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