There are a lot of different entities, or forms, that you can use to create a new business. One very popular business entity is the limited liability company or LLC. This is a business form that combines some of the features of a partnership and a corporation.

There are some big advantages for using the LLC form of business. It has become the favored choice for persons looking to start a new business (and particularly a small business), but, there are some disadvantages to the LLC form that need to be considered before deciding how to form your business.

State laws contol how an LLC is formed how it is to be run or operated. These laws vary from state to state. So, it's important to understand the laws in your area concerning LLCs, or get some help from an experienced business law attorney, before you decide to form an LLC.

What's an LLC?

The owners of an LLC, called members, get many of the same tax benefits as a partnership and enjoy the limited liability benefits of a corporation.

Typically, unless the members choose otherwise, an LLC is taxed almost exactly the same way that partnerships or sole proprietorships. Profits and losses are passed through to the members of the LLC, and there is no income tax at the business level, or double taxation.

A corporation has a tax on the corporation's net income, and the corporation's shareholders (or stockholders) must pay individual income taxes on any dividends they receive from the corporation. An LLC's profits, on the other hand,  pass through to the members, and they pay income taxes at their individual tax rates.

Choosing the LLC can bring you some significant tax disadvantages, however. For example, the profits you receive from the LLC most likely will be subject to self-employment taxes to cover the Social Security and Medicare taxes that most employees have withheld from their paychecks.

Like a corporation, the members of an LLC are generally shielded from personal liability for the LLC's debts and obligations. This is perhaps the biggest reason why the LLC business form is so popular. So, for example, if the LLC takes out a business loan and is later unable to repay it, the creditor can't sue the individual members to recover payment on the loan.

There are some important exceptions to this rule, however. Most state laws do not shield members from personal liability on a debt or liability owed by the LLC when, for example:

• The member personally guarantees the repayment of a debt
• The members use the LLC to commit fraud
• A member is negligent in appointing or supervising a manager, employee, agent or other member of the LLC with respect to some action that causes harm or damages to a third party

As always, it's best to talk to a professional about what's right for your company.

Related Resources on Lawyers.com^sm

- Contact a Business Law Lawyer in your area for specific legal advice, and read about Selecting a Business Law Lawyer
- Need a form? Access hundreds of Business Legal Forms, including these General Business Forms
- Read Limited Liability Partnership and Protecting Yourself Against Business Lawsuits, or access more Limited Liability Corporation articles and information
- Legal Dictionary
- Visit the Legal Forums for discussions on Business Organization or General Business topics