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Advantages and Disadvantages of LLC's

The LLC combines the limited liability advantage of a corporation with protection for the ownership interest. Yet, for several reasons business owners may prefer an LLC to either the LP or the corporation:

  • As with the S corporation, business owners can avoid double taxation with a LLC. The limited liability company sidesteps the C corporation's corporate income tax, if elected. Income from the limited liability company can be individually taxed to its members, as with a partnership. State corporate franchise can also be mitigated through an LLC.
  • Business owners incur no personal liability with a limited liability company. Like the corporation, LLC managers and members are personally protected from the creditors of the LLC—even when its members manage the company. In contrast, general partners of a LP are personally liable for partnership debts. The limited partners of a LP cannot participate in managing without incurring personal liability for partnership debts.

Factors that an advisor might recommend a corporation or limited partnership in lieu of an LLC include:

  • LLCs are relatively new and there are fewer court decisions that support some of its legal tenants. Accordingly, the LLC is less battlefield-tested than limited partnerships or corporations.
  • Limited liability companies do not have the corporate advantage of prior IRS rulings concerning the sale of worthless stock or stock sold at a loss, so tax consequences are a remote possibility in certain situations.
  • LLC membership interests do not get the same discounted valuations for estate tax purposes as do LP interests. Future court cases will ultimately clarify this issue.
  • If a business owner sells 50% or more of their ownership in the LLC in any one year it terminates the tax advantages of the limited liability company.
  • Owners of LLCs pay larger unemployment taxes on their earnings than corporate officers.
  • A business cannot "go public" in an LLC. To do so you need a C corporation.

Additional accounting, tax, and organizational issues may influence a decision about whether or not the LLC is the best option. No one entity is "perfect" and you must consider a wide range of factors when deciding upon you're an organizational choice in concert with the advice of an attorney and accountant.


The best defense is a good offense.