A Limited Liability Company (LLC) is a hybrid between a corporation and a partnership. Business owners in an LLC are not responsible for the debt of the company. In other words, they have limited liability. However, unlike a corporation, the business does not file separate taxes. Instead, each partner (called members) includes their profits on their personal tax return. When creating an LLC, develop an LLC Operating Agreement to set out the financial and working relations among business owners ("members") and between members and managers.
Main advantages:
- Owners have limited personal liability for business debts even if they participate in management
- Profit and loss can be allocated differently than ownership interests
- IRS rules now allow LLCs to choose between being taxed as partnership or corporation
Main drawbacks:
- More expensive to create than partnership or sole proprietorship
- State laws for creating LLCs may not reflect latest federal tax changes
- Inability to obtain VC funding
- Inability to provide employees with stock options
If you are unsure of which structure is best for your business, you can visit a New Jersey Small Business Development Center. Some business owners also seek professional advice from an attorney or accountant.
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