The Basics of an LLC

A limited liability company or LLC offers the flexibility and tax advantages of a partnership while providing the limited-liability benefits of a corporation. An LLC, like a corporation, is a separate legal entity which limits the personal liability of its owners.

The LLC can be a “pass through” entity for tax purposes by electing to be taxed as a partnership. This allows company profits and losses to be passed through the business and taxed solely on the owners' individual tax returns. This can be a substantial tax advantage.

LLCs are also much less formal entities than a corporation and are free of many of the legal requirements that govern corporations (including annual reports, director meetings, shareholder requirements and so on).

Along with limited liability and the pass-through tax benefit, LLCs also offer other advantages to small business owners. The owners, known as members, can split profits and losses any way they wish. In corporations, dividends are usually distributed evenly according to the percentages of stock held by each stockholder. An unlimited number of members may join a single LLC. Texas also allows single-member LLCs. This allows a single owner to form an LLC and elect to be taxed as a sole proprietor. By electing this tax benefit the owner can eliminate much of the annual accounting costs of filing a separate tax return for the LLC.

S-corporations provide some of the tax flexibility of the LLC. However, there are very complicated rules regarding S-corporation taxes which do not apply to LLCs.

There are also disadvantages to organizing your business as an LLC. In Texas, both LLCs and corporations are subject to the franchise tax. The tax rate is marginal and all entities which provide liability protection are subject to the tax. Also, keep in mind that LLCs are relatively new. There is a growing list of court cases available to help owners predict how legal disputes may affect their businesses but not as abundant as for corporations.