Why Form a Business LLC?

by Tom Chmielewski
An LLC's simplicity and flexibility makes it a popular choice for small business.


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A limited liability company can offer liability protection that a sole proprietorship or a partnership can’t offer, and a tax advantage not found in a corporation. The LLC has become a popular small business structure in the United States, because it’s easy to form, and very flexible in the types of businesses for which it’s well suited.

Limited Liability

The key advantage of an LLC for small business is it protects business owners’ personal assets from a company’s debts, as would a corporation. In a worst case scenario, an LLC can go bankrupt, and an LLC member, as its owners are called, won’t lose his house. But that is a limited protection, as the name applies. If a member uses his house or other assets as collateral for a business loan, those assets are at risk. And if an LLC member is too loose about keeping personal funds and expenses separate from business accounts, a court can rule the separation doesn’t exist. If that happens, a member’s personal assets may be at risk.

Pass-through Taxation

A corporate structure can protect personal assets as does an LLC, but it also imposes a double tax on a company’s profits. The United States charges a corporation a tax for its entire profits, and then taxes shareholders for the share of the profits received as dividends. An LLC allows members to report their share of the profits on their personal income tax returns without the company itself being taxed.


The IRS doesn’t recognize an LLC for tax purposes, since it’s a business structure regulated by each state. By default, the IRS treats a single-member LLC as a “disregarded entity” or a sole proprietorship, and a multi-member LLC as a partnership in most instances. But LLC members can elect to be taxed as a corporation. This can be an advantage, depending on how profits are distributed, since a sole proprietor’s profits or partners’ share of the profits are also subject to self-employment tax, while profits distributed as dividends are not. Yet while treated as a corporation for taxes, legally the company remains an LLC. Seek an accountant's advice to determine the advantages of each situation.


A corporation requires a great deal of paperwork in filings, minutes of director meetings and other reports. LLCs avoid most of that paperwork. Corporations are also restrictive on who can be owners. There is no limit on the number of members an LLC can have. Members can be individuals, companies and even other LLCs.

Special Purpose LLCs

LLCs can be formed for a special purpose, such as creation and management of a particular project. Once the project is completed, the LLC disbands. Special purpose LLCs can control real estate projects, or are formed by film production companies to cover the production of a single movie. A special purpose LLC allows investors to put money into a single project by judging the viability of the project itself rather than the long-term profitability of a company.

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