A limited liability company (LLC) is a type of business structure that provides its owners with protection from being personally responsible for business-related debts and obligations. Owners of an LLC are called members. The concept of limited liability separates the business organization from its owners, investors, and shareholders in terms of legal liability. This shields them from being personally liable for the debts or obligations of that business. So if a business’s debts exceed its assets, that company can go bankrupt without its owners risking their personal assets.
Key Advantages and Disadvantages of an LLC
Advantages:
- Limited liability: Members are not personally liable for the company’s actions.
- Tax efficiency: LLCs are currently classified as a pass-through entity. Profits go directly to members without being taxed separately.
- Avoidance of double taxation: LLCs avoid double taxation that can occur with corporations.
- Simplicity and flexibility: Simplicity and flexibility of organization compared to corporations.
Disadvantages:
- Raising capital: Difficulty raising investment capital compared to corporations.
- Perpetuity issues: No perpetual life. An LLC may have to dissolve upon a member’s death or withdrawal depending on operating agreement terms.
- Self-employment taxes: Members pay self-employment tax on LLC profits.
Public Disclosure and Privacy Concerns
What is a disadvantage of a limited liability company? Public disclosure is one disadvantage. Financial statements submitted to the government can reveal member income that members wish to keep private.