Running a business comes with certain risks. One such risk is being held liable for anything that could go wrong with the company. This is why many people choose to apply for a limited liability company or LLC to avoid any liabilities.
Separation of personal and business assets
Compared to other forms of businesses such as a corporation, an LLC allows its members to secure their assets. This means they can set boundaries between business investments and personal assets. This means that when an LLC goes bankrupt, creditors cannot go after the personal properties of the members. Lending institutions don’t have the power to seize their houses or other valuable properties.
Another important advantage of forming an LLC is its taxation system. Required taxation for its members is on a pass-through taxation system. Instead of paying both corporate and individual taxes, members are taxed on their earnings only once. If an LLC has a single member, the taxes are filed under the member’s tax return. In the case of an LLC with multiple members, the company generally files a partnership tax return.
Members of an LLC may be individuals or partnerships. They may also be non-resident aliens. The owners can manage the company directly or they can assign a manager who may also be one of the members. This provides the company with management flexibility. Additionally, there’s no need to set up meetings and minutes, which is the case with small businesses and corporations.
An LLC’s Operating Agreement usually indicates the rights and responsibilities of the members regarding profits, losses, distribution, and other financial issues. In an LLC, special allocations of profits are allowed. This means the distribution of profits (and losses) doesn’t need to be in proportion to the ownership percentage. This is important especially if the balance of responsibility changes over time. Ultimately, the member who has the most contribution can reap higher rewards, with each partner retaining the same ownership interest.