Choosing a limited liability company (LLC) as a business structure provides a range of benefits for all types of companies.
Business owners who start a business as an LLC complete the process through their state, so the rules and fees associated with incorporating vary somewhat, but the advantages are consistent: personal liability protection, flexibility in operational and taxation structure, and wide eligibility.
LLCs have several advantages over sole proprietorships and general partnerships.
What is an LLC?
An LLC is a type of business structure that provides its owners with limited liability in the event the business fails. It’s a hybrid entity that combines the characteristics of a corporation with those of a partnership or sole proprietorship.
What are the advantages of forming an LLC?
Here are nine main benefits of an LLC:
- Personal liability protection
- Inexpensive and easy to form
- Flexible taxation
- Ownership flexibility
- Management flexibility
- Distribution flexibility
- Appropriate for individuals
1. Personal liability protection
One of the primary benefits of forming an LLC is that it separates your personal assets from the business. This protects your home, car, and savings in the event that your business is sued or defaults on a loan.
An exception is if you sign a personal guarantee for business financing. That does give creditors the ability to hold you personally responsible for repaying the debt. Additionally, you could also be held personally accountable in a lawsuit if there’s evidence of fraud or negligence causing harm to those involved.
2. Inexpensive and easy to form
Compared to corporations, starting a business as an LLC is quite easy and inexpensive (usually less than $1,000).
The exact process is determined by your state, but the paperwork is typically minimal, as is the cost. In addition to filling out a short formation document, you’ll need to file Articles of Organization and an LLC operating agreement, which outlines the ownership structure of the new company. You don’t have to draw these up from scratch—templates can be found online. You can also enlist the help of a tax professional.
Forming an LLC is often more appealing to small businesses than forming a corporation because it involves much less operational complexity. LLCs aren’t required to hold an annual shareholders meeting, nor do they need to file an annual report each year. You just need a registered agent, which is a person or company that will accept any legal or tax documents for your business.
3. Flexible taxation
Choosing an LLC as your entity type gives you a few different options on how you pay taxes. Unless an LLC elects to be taxed as a C corp, LLCs don’t pay corporate taxes.
The IRS allows LLCs to pass profits through to their owners as personal income. This is called pass-through taxation, and it offers savings by avoiding double taxation (at the corporate level and at the personal level).
However, depending on the tax classification you choose, you may need to pay self-employment taxes. The four tax designations for an LLC are:
- Sole proprietorship (single-member LLCs only). In a single-member LLC taxed as a sole proprietorship, the business profits pass through to the owner(s), and they pay income tax on the full amount. Owners are considered self-employed and must also pay self-employment taxes, covering Social Security and Medicare.
- General partnership (multi-member LLCs only). In a multi-member LLC taxed as a partnership, the business profits pass through to each member, and each must pay income tax on their portion. In most cases, each member also pays self-employment taxes.
- S corporation (single or multi-member LLCs). LLC owners taxed as an S corp may choose to pay themselves a salary and pay payroll taxes on their salary amount. The balance of the business profits pass through to the owner(s) as income, but they do not have to pay self-employment tax on these profits. S corps also do not pay corporate taxes, as they are pass-through entities.
- C corporation (single or multi-member LLCs). When taxed as a C corp, all business profits are taxed at the corporate rate. Any profit distributions taken by LLC members are also subject to personal income taxes; this is known as double taxation. Members of a C corp don’t have to pay self-employment taxes, but any member that is paid a salary by the LLC will pay payroll taxes on their wages.
A recent change in tax law known as the QBI (qualified business income) deduction also helps many LLCs qualify for a federal tax deduction on pass-through income. Through 2025, business owners with pass-through income may deduct as much as 20% of their net income on their federal tax returns.
4. Ownership flexibility
LLCs offer flexibility in ownership structure, with no restrictions on the number or type of members. This enables a broad range of potential investors, both individuals and entities, to participate.
Suppose you start an LLC with a partner where you own 70%, and your partner owns 30%. Later, you decide to bring in an additional investor who contributes valuable assets to the company. With an LLC, you can easily change the ownership structure to accommodate this new member, adjusting the percentages according to the agreed terms without complex legal restructuring.
5. Management flexibility
There is no limit to how many owners an LLC may have. There’s also no requirement to maintain a governing body like a board of directors or a set of officers, as a corporation would.An LLC allows for either member-managed or manager-managed structures.
This flexibility enables the members to choose the best management structure for the business, be it a more hands-on role for all members or delegation to a designated manager or management team.In a member-managed LLC, every member may have a say in the daily operations, making decisions together.
Alternatively, in a manager-managed LLC, the members might appoint one member or an outside manager to handle day-to-day operations, leaving other members free to focus on other aspects of the business or personal pursuits.
6. Distribution flexibility
An LLC business structure allows members to determine how profits are shared. This differs from a general partnership, which requires all partners to split company profits equally.
Instead, LLCs allow profits to be split by whatever terms are outlined in the operating agreement. If one member invests more money upfront or puts in more sweat equity (doing the hard work of bringing the business to fruition), the agreement could give them a larger share of the profits.
Forming an LLC adds credibility to the business by showing clients, suppliers, and potential investors that the company is a legitimate and serious entity. You can also open a business bank account when using an LLC as a legal entity.
LLCs offer more privacy than corporations do because they don’t have to disclose their ownership structure publicly.
Suppose a well-known celebrity wants to invest in a startup but doesn’t want their involvement to be publicly known. By investing through an LLC, they may be able to keep their ownership private, depending on the jurisdiction and the specific rules governing LLCs in that location.
9. Appropriate for individuals
The advantages of an LLC don’t just apply to multi-member companies. Individuals can benefit as well by opting for a single-member LLC. You get personal asset protection, and you also have more flexibility in how you want to be taxed.
For some businesses, electing to be taxed as an S corp may create tax savings; but state rules about S corp status vary, so make sure to do your local research.
What are the disadvantages of an LLC?
There are some drawbacks to choosing an LLC as your business entity:
- There are exceptions to personal liability protection, such as instances of fraud or corporate malfeasance.
- While corporate taxes are usually bypassed, you may owe self-employment taxes.
- It may be difficult to transfer ownership compared to other options like C corporations, which have an unlimited number of shareholders.
Business owners who are unsure of which business structure to choose could benefit from legal advice from a lawyer or tax professional who is well-versed in small businesses.
LLC laws vary from state to state. For guidance on how to start an LLC in your state, check out our state-specific guides:
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
Running a successful business involves more than selling products or finding clients. It’s also important to get a firm grasp on the administrative side of things, including maximizing the benefits of your business structure and securing funding. Both individuals and larger companies can form an LLC to protect their personal assets and enjoy tax advantages.
Advantages of LLC FAQ
What are the pros and cons of an LLC?
- Limited Liability: An LLC provides limited liability protection for its owners, meaning that the owners are not personally liable for the debts and liabilities of the business. This can shield personal assets from creditors and lawsuits.
- Pass-Through Taxation: An LLC allows for pass-through taxation, meaning the business does not pay taxes on its income. Instead, taxes are paid by the individual owners, who report the business’s income on their personal tax returns.
- Flexible Management Structure: An LLC can be managed in a variety of ways, including by owners, managers, or a combination of both. This allows for a lot of flexibility when it comes to managing the business.
- Limited Ownership: An LLC generally can only have up to 100 owners. This can be a limiting factor for businesses that want to bring in additional capital.
- Cost of Formation: Forming an LLC can be a costly process, as it often requires filing fees, legal fees, and other costs associated with setting up a business.
- Lack of Continuity: An LLC is a limited duration entity, meaning that it will dissolve when one or more of the owners leaves the business. This can make it difficult to pass the business on to the next generation.