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Definition

Limited liability company (LLC)

The limited liability company (LLC) is a form of business organization that combines the limited liability advantage of the corporation with the tax advantages of the partnership.

The concept originated in Germany and was first introduced in the United States in 1978 which is rapidly gaining popularity. Along with the subchapter S corporation, it is a popular choice for start-up firms. As with partnerships and corporations, the profits of an LLC flow through to the tax return s of the owners and are not subject to double taxation.

Advantage of Limited Liability Company

  • Members are liable for the debts and obligations of the business only up to the amount of their investment.
  • The number of shareholders in unlimited.
  • An LLC can elect to be taxed as a sole proprietor, partnership, S corporation, or corporation, providing much flexibility.
  • Because profits are taxed only at the shareholder level. There is no double taxation.

Disadvantages of a Limited Liability company

  • Setting up and maintaining one is more difficult and expensive
  • Tax accounting can be complicated.
  • Some of the regulations governing LLCs vary.
  • Because LLCs are relatively new type of business entity, there is not as much legal precedent available for owners to anticipate how legal disputes might affect their business.
  • Some governments levy a franchise tax on LLCs –which is essentially a fee the LLC pays the government for the benefit of limited liability.
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