Advantages and Disadvantages of Forming a Limited Liability Company (LLC)

Written by Adam Peck Category: Injury Law January 15th, 2013 2 min read

When forming a new business, it’s important to make the right decision for personal liability as well as minimizing the company’s tax liability. A limited liability company is a relatively new option and designed to give entrepreneurs another option for a business entity. There are some advantages to forming an LLC as opposed to other options. This article looks at some of those advantages and disadvantages of filing for a limited liability status.

What is a Limited Liability Company?
An LLC is a business entity that is formed under state law. Some regulations can differ by state but the basic rules are similar from state to state. An LLC is similar to a corporation when it comes to personal liability of the company’s owner(s). Where income tax liability is concerned, an LLC can be treated more like a sole proprietorship or partnership.

Personal Debt Liability of an LLC
One of the biggest advantages of a limited liability company is it allows limited personal debt liability to the business owner(s). If the business has formed an LLC and the company has difficulty paying its debt, generally the company that has a debt claim can go after business assets, not personal assets. A business that has not elected to form an LLC or another type corporation could risk personal assets to satisfy a business debt.

Many companies that are offering open credit terms may request a member of the LLC to sign a personal liability wavier. By having a member sign a waiver, they reduce their risk of uncollectable accounts. Signing a personal liability wavier could result in holding an LLC member personally liable for business debt. This action could negate one the biggest advantages of forming a limited liability company.

Tax Advantage of a Limited Liability Company
When it comes to personal debt liability, an LLC is treated more like a corporation. When it comes to income tax liability, an LLC is treated more like a sole proprietor ship or partner ship. Most corporations’ tax liability is based on net profits from the business. The officers of the corporation are also taxed separately for their own personal income that’s derived from the business.

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Written by Adam Peck

Expertise: Personal Injury

Adam J. Peck, ESQ is a principal with Peck Law Group, APC. In 2008, Mr. Adam Peck received his Juris Doctorate from Whittier Law School where he graduated Cum Laude. His practice is primarily dedicated to representing Elders, Dependent Adults, along with their loved ones and family members, who have suffered horrific personal injuries.