Managing and making business decisions are more flexible for LLC owners

by Veronika Chaika

Your business assets are the same in a partnership or sole proprietorship. Business debts are also your obligations. And if your business partner or employee is alleged to have been negligent, your assets may be at risk. You can lose your investment in, but you cannot use personal assets like your home and bank account to collect on business debts.

LLCs are responsible for their debts and obligations. As well as protecting your assets, your business itself is protected in case of negligence lawsuits by employees, business partners, or the business itself. In addition to limited liability, corporations are subject to certain rules that may not be appropriate for small informal businesses. Corporations, for example, are typically required to hold shareholder meetings annually, file annual reports, and pay state fees. They are also expected to keep extensive records.

A limited liability company (LLC) can adopt any IRS tax status, regardless of whether its tax classification is a sole proprietorship, partnership, S corporation, or C corporation. Depending on whether LLCs have one owner or more than one, the Internal Revenue Service automatically classes them as partnerships or sole proprietorships. As a result, LLCs can always use “pass-through” taxation, meaning that the LLC pays no LLC taxes or corporate taxes.

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Rather than paying tax on its profits, the LLC’s income and expenses are passed through to its owners’ tax returns. S corporations, however, receive pass-through tax treatment and are not subject to double taxation. Traditional C corporations, on the other hand, pay taxes twice on distributions to shareholders.

The management structure of a corporation is fixed and consists of a board of directors overseeing company policies and officers responsible for managing day-to-day operations. Shareholders must meet every year to elect directors and conduct other company business. LLCs don’t need to follow this formal structure. LLC owners also have greater control over how their business is run and decisions are made. LLCs are not required to distribute profits equally or according to ownership percentages, but they can do so in various ways.

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