LLCs have a flexible organizational structure to go along with their flexible tax designation. These in include:
Limited Liability Protection
An LLC protects most of the members’ assets, restricting liability to the personal interest each person has invested in the company. The signatory on a business loan, for instance, would still be liable to make the payments on that loan. However, members are not liable to pay any monies awarded because of a lawsuit filed against the LLC.
A single-member LLC has the same tax structure as a sole proprietorship, in which business losses and gains are paid through the member’s income tax. This has real advantages for a small-business startup, since members can use early business losses to offset taxes owed on other income.
Few Ownership Restrictions
There are no citizenship or residency restrictions on who can become a member of an LLC, nor does a member have to incorporate in the same state where they registered the LLC. States only require that individuals be of the age of majority, 18 in most cases, to register an LLC.
That means, not only that foreign nationals can become members, but also that corporations and other LLCs can become members of an LLC. In some cases, another corporate entity may be the sole member of an LLC. In that event, they would be treated as a partnership or multi-member LLC for tax purposes.
Minimal Compliance Requirements
LLCs have few state-mandated requirements other than an annual filing requirement with minima accompanying paperwork. All other compliance regulations are subject to the rules determined by the LLC’s operating agreement. LLC can have whatever meetings they wish and can document those meetings however they wish; they are not formally required to hold annual meetings with the board of directors and shareholders.
Flexible Allocation of Profits to Individual Members
The LLC can choose to distribute profits to its individual members based on their ownership percentage. For instance, in a two-member LLC, each member would receive 50 percent of the profits. However, unlike corporations, which must distribute profits that reflect the exact percentage of each shareholder, LLC members can also predetermine a special percentage allocation; if one of the two members contributes more to the company for instance, he/she might receive 70 percent of the profits.
Versatile Tax Designation
LLCs can choose how they are treated as a taxable entity. Although, the default established by the IRS, is that LLCs be taxed as partnerships, an LLC can elect to be taxed as a C or S corporation whenever its members decide to make the change.