What does limited liability company (LLC) mean?
A structure within business that is a blend of a corporation and a partnership. For taxation purposes, an LLC is the same as a sole proprietorship or a partnership, limiting the liability of the owners in the same way as a corporation. The protection of assets is similar to a corporation, but the pass-through taxation of the LLC is similar to a partnership. Many ecommerce businesses choose to organize as an LLC because it is a low cost and carries far fewer legal reporting requirements.
A limited liability company is not considered to be a separate entity, and the company does not pay taxes and does not need to take on losses. This is carried out instead by the owners of the LLC who will have to reports profits and losses on their own personal tax returns. As the members of the LLC are protected from personal liabilities, an LLC is similar to a corporation.
As you might have already guessed, there are both advantages and disadvantages to an LLC, especially in terms of corporate structure. One of the disadvantages is that an LLC must be dissolved if one of the members enters bankruptcy, or passes away. This is very different from a corporation, which last in perpetuity no matter what happens to officers, board members, or even the founder of the corporation. And even though an LLC can be converted to an S or C corporation, it may not be the best option if the founder plans on eventually taking the company public.
The main advantage, and primary reason for choosing an LLC formation, is to limit the liability of the principles. In fact, an LLC is really nothing more than a formal partnership arrangement, although the partnership can be limited to just one principle. Besides being easier to set up, an LLC can also provide more flexibility and protections than a corporation. Those considering an LLC should know that creditors can pierce the corporate veil of an LLC under certain circumstances, such as when reporting requirements haven’t been met, or if some type of fraud exists.