Advantages and Disadvantages of Limited Liability Company

The Limited Liability Company (LLC) is the newest form of business legal structure that allows owners the protection from personal liability that is provided to the corporate structure and the pass-through taxation of the partnership. Laws regarding the LLC are evolving, and some issues are complicated. Most certainly, discuss this option with an attorney and/or an accountant to determine the best course of action for your business. An LLC has its own advantages and disadvantages


* LLC partners have complete management and control of the business while also enjoying limited liability. However, if the number of partners exceeds 15 to 20, it is probably better to form a corporation to most efficiently manage the business.

* An LLC works well for professional service businesses, such as lawyers and commercial real estate developers and investors.

* An LLC can also work well for start-up companies because they can deduct the losses that they expect in the first few years of business.

* The additional required record keeping on management decisions can help to avoid disputes among partners.


* It is better and less complicated to incorporate when the company is a capital-intensive, fast-growing start-up that plans to seek outside investment capital, to offer equity sharing plans to employees, or to do an IPO. There is ongoing record keeping required. All states require LLCs to file “Articles of Organization” and charge a filing fee. The filing fee varies from state to state.

* LLCs with more than twenty partners need to hire a manager to manage the business on behalf of the larger, more inactive membership. This can get complicated and expensive.

The big benefit of an LLC is the pass-through of income tax benefits. Distributions to members of a limited liability company are not limited to surplus capital. Stockholders become members under the structure of a limited liability company and directors become managers. Management is elected by the members.

One of the few minuses is that a limited liability company is dissolved when any member opts out or cashes out of the firm. But you can get around that by having a provision in your bylaws that the LLC continues by unanimous vote of the members.

First created in Wyoming in 1977, limited liability companies did not truly begin to spread until they received a favorable ruling from the Internal Revenue Service in 1988. The most likely candidates to become limited liability companies are small businesses and professional firms, such as law firms, accounting firms, medical groups, architectural firms and engineering firms. You operate in an informal manner and don’t have to deal with the baggage you get in a corporate format. And it would offer more liability protection than a partnership.

One major advantage of a LLC is that the members will not be responsible for the liabilities of the LLC. The LLC is a separate legal entity and has its own existence independent of its members. An LLC can be a single member LLC or a multi member LLC.

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