A limited liability company (LLC) is a legal structure that protects its owners from the liabilities of the company.¹ This separation provides what is called limited liability protection.

Pros and Cons of an LLC

In an LLC, the owners’ assets are separate from that of the company. The terms of an LLC can protect a member from the activities of another member. While there’s no limit on the number of people forming an LLC, there could be restrictions on the type of business.²

One key advantage of LLCs over corporations is that LLC owners are not subject to double taxation.³ Instead of paying taxes on the profits generated by the LLC, owners can file individual tax returns. LLCs are also more flexible when compared to corporations; there is no requirement for conducting annual meetings or generating reports unless specified in the organization article.

However, setting up an LLC does not offer absolute protection. If an owner fails to separate their personal finances from those of the business, a person or business can come after their personal assets. What’s more, fraud or wrongful actions could jeopardize the protection offered by an LLC.⁴

When operating an LLC, owners must maintain clear legal separation between the LLC and themselves.⁴ For instance, owners cannot use the LLC's bank account to pay their personal bills. Additionally, there are costs associated with setting up an LLC.

Example

Rex and Mia plan to set up a business but do not have enough capital to start a corporation. They are also worried that the business may fail and that their life savings would be jeopardized. An LLC is a viable option in such a scenario because it offers protection and does not require a large amount of capital.

Sources

1. Limited Liability Company (LLC). Investopedia.

2. Limited Liability Company (LLC). IRS.

3. LLC vs. S Corporation: What's the Difference? Investopedia.

4. Piercing the Corporate Veil: Understanding the Limits of LLC Protection. Legalzoom.

Please note that this article is for educational and informational purposes and is believed to be accurate and reliable as of posting date but may be subject to change. The example above is hypothetical and is for illustrative purposes only. Alpaca does not provide investment, tax, or legal advice. Please consult your own independent advisor as to any investment, tax, or legal statements made herein.

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