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What are the benefits of forming an LLC relative to other business structures?

A: Except in cases where owners expect to solicit significant venture capital for or publicly trade interests in a new business venture, an LLC is an almost universally superior entity of choice over a corporation or partnership.   In general, corporations are excellent in providing owners with personal liability protection, but they are subject to double federal taxation and governing state statutes which impose relatively rigid management and operational requirements.   Organizers of a corporation must, among other things, appoint directors and officers, adopt bylaws, issue stock certificates, and set up minute books.   Partnerships deliver more favorable tax treatment, but at a minimum leave one general partner personally liable for the debts and obligations of the business.   Indeed, the partnership form provides no more personal asset protection to owners than operating as a sole proprietor.   In great contrast, the LLC provides:

• Limited Liability for Owners: As suggested by the name, LLC members have the liability protection of a corporation. This means that members cannot be held personally liable for a company's debts unless they have signed a personal guarantee. Further, members are not personally liable for the actions taken by other members. In addition, LLC members also have statutory asset protection from personal creditors;

• Contractual Freedom: Owners forming LLCs have very broad contractual freedom in tailoring arrangements among themselves to meet each member's needs and interests. This freedom is reflected in the fact that virtually all rules in most state LLC acts that govern members and managers are, by their terms, "default" rules that the members may validly alter in their LLC agreement. The importance of this benefit cannot be overstated. The LLC is a creature of contract, and may be drafted with great specificity to conform to the purposes and requirements of nearly any business venture; and

• Pass-Through Taxation: All LLC business losses, profits, and expenses flow through the company to the individual members. Members avoid the double taxation of paying corporate tax and individual tax. Generally, this will be a tax advantage, but circumstances can favor the election of an S corporate tax structure, which is also permissible under IRS rules.

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