A Limited Liability Company (LLC) is a hybrid between a Corporation and a Partnership. An LLC provides the liability protection of a Corporation with the pass-through taxation of a Partnership. Limited Liability Companies are becoming popular due to their flexibility in management and the personal liability protection offered to their members.
While LLCs don’t provide many of the same fringe benefits as a Corporation, the flexibility and simplicity of ownership makes them the ideal tool for a small company looking for liability protection.
The owners of an LLC are called members and they work in a similar capacity as the shareholders of a Corporation. The members buy interest in the LLC with cash, property or the promise of payment.
LLCs have far fewer restrictions on membership than an S-Corporation has on shareholders. LLCs also allow members to participate in management of the LLC without losing their protection from liability, whereas a limited partner in a Limited Partnership does not have this benefit.
Corporations can even be a member or manager of an LLC. This allows greater flexibility than an S-Corporation which places restrictions on the number of shareholders and who can be a shareholder.
LLCs are owned by the Members, similar in scope to shareholders in a Corporation. LLCs can be managed by its members, they may choose to have a professional manager or they can make one of the members a manager. When you form an LLC you will be asked if you want to be “member managed” or “manager managed”. Members can be individuals or other entities, such as a Corporation.
An LLC can be structured to be taxed as either a "pass-through" entity or as an association that pays its own taxes.
Members of an LLC have the same liability protection as shareholders of a Corporation.
The main disadvantage of LLCs is that their use is relatively new in the United States, so there is no uniformity in the laws that govern them between individual states.
The following table provides a look at the LLC vs Corporation, and LLC vs S-Corporation. Tax comparisons can be found in the lower portion of the table.
C-CORPORATIONView the Details Incorporate Now
LLCView the Details Incorporate Now
S-CORPORATIONView the Details Incorporate Now
Stock, there may be different classes.
|Membership interests. There may be different classes of membership.||One class of stock. Which may be voting or non-voting.|
|Eligible Owners||No restrictions.||No restrictions.||100 shareholder limit. No non-individual and no non-resident alien shareholders.|
|Management||Managed by director(s) and officer(s).||Two Management Types
- Managed by Manager
- Managed by Members
|Managed by director(s) and officer(s).|
|Allocations of Ownership||None. Dividends must be paid based upon stock ownership.||Permitted if the allocations have substantial economic effect.||None. Income, gain, and loss pass-through to the shareholders based on the percentage of shares owned.|
|Liability Protection||There is limited liability for shareholders, officers and directors.||There is limited liability for members and managers (if applicable)||There is limited liability for shareholders, officers and directors.|
|Duration||Perpetual||Dissolves at the time specified in the Operating Agreement or upon the loss of a member unless other members agree to continue.||Perpetual|
|Transfer of Ownership||Shares freely transferred.||There may be restrictions under certain state laws.||Shares can be transferred only to eligible S-corporation shareholders|
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