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Understanding business formation: LLCs

From corporations to general partnerships, most prospective business owners are undoubtedly familiar with at least a few of their options when it comes to organization. However, what they might not realize is that there is a business formation option that functions as a sort of hybrid of these two: limited liability companies.

While they might associate limited liability companies -- or LLCs -- with the private practices of physicians, dentists, accountants or even attorneys, it's actually a viable business structure for many other ventures.

Characteristics shared with a corporation

As we've discussed in previous posts, the shareholders in a corporation enjoy limited liability, meaning they typically cannot be held personally liable for the actions or debts of the corporation.

The owners of an LLC enjoy similar protection, meaning that if the business is somehow unable to meet its payment obligations to vendors, lenders, landlords or other creditors, the LLC owners do not have to worry about their personal assets. In other words, it's only their actual investment in the LLC that is imperiled, not their homes, vehicles or personal belongings.

Characteristics shared with a general partnership

One of the defining traits of a general partnership is that it doesn’t actually pay income taxes. Rather, income tax liability is only reserved for the partners who must report their profits/loses on their individual returns.

This tax treatment differs from a corporation, which is taxed on its earnings at the entity level and whose shareholders must also pay taxes on any dividends received.

Like a general partnership, an LLC's distributed earnings are taxed only once, such that the owners are only responsible for reporting their losses/profits. It should be noted, however, that an LLC is subject to different financial recordkeeping and reporting requirements.

We'll continue this discussion in a future post …

Consider speaking with an experienced legal professional if you have questions or concerns about LLCs or business formation in general.

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