What Is a Limited Liability Company? Pros and Cons of LLC

Triston Martin

Feb 03, 2022

LLCs are corporate firms in the United States that shield their owners from personal accountability for their debts and obligations. Hybrid businesses limited liability companies(LLCs) combine the advantages of both corporations and partnerships and sole proprietorships. When it comes to flow-through taxation, an LLC is more like a partnership than a corporation, which has limited liability.

Creating a Limited Liability Company

LLC rules differ from state to state, but specific recurring themes exist. Owners or participants must first select a name for their venture. The state will then get a copy of your articles of incorporation. Articles of Incorporation specify the rights and responsibilities of each LLC member. Additionally, the paperwork includes the names and addresses of the LLC's members, the name of the LLC's registered agent, and the company's stated mission. A charge is paid directly to the state for filing the articles of formation. Additional payments and paperwork must be submitted to the federal government to receive an EIN (EIN).

Partnership vs. Limited Liability Company

Because an LLC keeps its assets distinct from its owners, it is more tax-efficient than a partnership in managing debt and other responsibilities. Profits accrued by limited liability companies (LLCs) and partnerships can be distributed to the entities' shareholders. Only the amount invested can be utilized to offset their losses. For a partnership, the LLC must submit Form 1065. Form 1120 is filed if the members have chosen to be considered a company.

Benefits and Drawbacks of Limited Liability Companies

Let's look at Sam, Paul, and Harry to see thebenefits and drawbacks of forming a limited liability business. Neither of them is excited about the prospect of starting a business jointly since it would require them to assume personal responsibility for the company's obligations. A company has limited commitment, but the terms in a corporation annoy them as well.

What are the Advantages of a Limited Liability Company?

Limitation of Liability

This is a benefit that corporations provide that a limited liability business can use. As a distinct legal entity, a corporation shields its members from being held accountable for their actions in the firm.

Let's say, Paul, Sam, and Harry founded a business together. To put money into a hazardous enterprise, you'll need a sizable loan. And, regrettably, the initiative fails, resulting in significant financial losses. As a result, the business cannot repay the bank loan is received. Consequently, if the bank files a lawsuit, the court has the power to order Paul, Sam, and Harry to sell off their company's assets and repay the debt.

Advantages in Taxes

In legal terms, a Limited Liability Company's earnings are considered the earnings of the company's members/owners. By contrast with corporations, members of a limited liability firm are spared the burden of paying taxes on their personal and corporate income. For firms, the profits are initially taxed at a corporate tax rate before being distributed to shareholders as personal income tax. This is how the system works.

Distribution of Income

It is possible to distribute the firm's revenues in many ways using a limited liability corporation. As a result, the business's profits under this structure do not have to be dispersed in the same proportion as the partners' initial contributions. Paul, Sam, and Harry each put down $20,000 in the company. On the other hand, Harry devotes more time and effort to the company than the others. As a result of his increased time and effort, Harry is entitled to a more significant part of the company's revenues.


Limited liability businesses have the additional benefit of being simpler to start up and manage than corporations. Suppose you'd like to start your own limited liability company. In that case, all you need to do is fill out some paperwork, such as an Articles of Association and an Operating Agreement (which spells out things like the accounting methods the company will use, the members' rights and responsibilities, and so on) before you can get started.

Disadvantages of an LLC

Raising Funds Is Difficult

Equity and debt are the two main ways a limited liability business can raise money, much like a corporation. Selling shares in the company is the only way to raise money. This will also necessitate the addition of one or more new members to the group. As a result, you'll be able to split your gains with another person (or more). Existing members may have to give up some of their authority to the new member.

State-to-State Confusion

Because limited liability corporations are registered in the states rather than the federal government, each state may have its own rules for these businesses. Since each state has its own set of rules and regulations, operating a business in many states may be a bit of a challenge. As a result, an interstate firm may not be a good fit for this type of company structure.

Non-Eternal Existence

As a general rule, founders in the United States are required to specify a lifespan restriction for their business. Without this condition, the existence of a limited liability corporation will be terminated in the case of the death or withdrawal of a member. When the exiting partner's ownership interest is transferred, several constraints must be met, particularly for this corporate organization.

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