The limited liability company is a private enterprise similar to sole proprietorship. But what are the benefits of an LLC in an economically changing world? Well, with a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation, I think it promises so much goodies for the wise capitalist.
The truth is that membership interests in LLCs and partnership interests are also afforded a significant level of protection through the charging order mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor’s share of distributions, without conferring on the creditor any voting or management rights.
However, limited liability company members may, in certain circumstances, also incur a personal liability in cases where distributions to members render the LLC insolvent. On the positive side, LLCs are subject to fewer regulations than traditional corporations, and thus may allow members to create a more flexible management structure than is possible with other corporate forms.
As long as the LLC remains within the confines of state law, the operating agreement is responsible for the flexibility the members of the LLC have in deciding how their LLC will be governed. More or less, there is more to say as concerning the question of what are the benefits of an LLC? Check them right below!
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Pass-through Taxation
A limited liability company is a pass-through tax entity. Put simply, this means that the LLC’s gains, losses, income, deductions, credits, and other tax items flow-through to the member or members. The members report their share of these tax items on their personal income tax returns and pay taxes at the individual tax rates. An LLC is not subject to entity-level taxation unless it elects to be taxed as a C corporation.
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Limited Liability
Limited liability is not absolute. Because an LLC is a separate entity, the owners of the company have limited liability. This is one of the most important benefits to operating as a limited liability company. Limited liability means that the individual assets of LLC members cannot be used to satisfy the LLC’s debts and obligations. A member’s risk of loss is limited to the amount that the member invested in the business.
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Flexible Management Structure
Separate existence, limited liability and perpetual existence are benefits from operating as either a corporation or a limited liability company. However, one benefit that is specific to the LLC is its flexibility. The LLC’s members have many options for the management structure. By state law, the control over the LLC’s business rests with its members.
However, the LLC—through its operating agreement and/or its articles of organization — can provide that it will instead be controlled by managers. Managers can be members or non-members, based on what is provided in the operating agreements.
This flexibility means that the LLC is suitable for a few owners who wish to run the business together, as well as for a business venture with many owners, spread across the country.
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Independent Legal Identity
Being another answer to what are the benefits of an LLC, a limited liability company (LLC) is an entity that is separate and apart from its owners, with its own rights, responsibilities and liabilities. This means that an LLC can file a lawsuit (or be sued) in its own name. The company can also buy, own, and use its own real or personal property, make its own contracts and guarantees, lend money and invest funds.
Those who do business with a limited liability company must look to the company to satisfy any obligations owed to them, and not to the LLC’s members or managers.
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Financial Interests Transferability
An LLC member is an owner of the LLC and the member’s ownership interest is referred to as a membership interest. A membership interest has two parts: financial rights and management rights. The members’ financial rights include the right to share in the profits and losses and receive distributions from the LLC.
These rights are the personal property of the member and the default statutory rule is that they may be transferred without restriction. However, most state statutes provide that there are restrictions on the transfer of the remaining interests—including the right to participate in the management of the LLC.
This means that a member cannot sell or transfer his or her entire interest, including management rights, without the consent of all of the remaining members. Of course, the LLC’s operating agreement can alter the default rules. For instance, it can provide for less than unanimous consent.
LLCs also offer what is called “charging order” protection. This protects the LLC (and the other members) if a member’s personal creditors seek to seize the member’s LLC interest. While the creditors can reach the financial rights, they generally cannot step into the shoes of the member with regard to managing the LLC.
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Perpetual Existence
Another answer to the question of what and what are the benefits of an LLC is included in this. Unless the articles of organization specify differently, a limited liability company has perpetual existence. This means that the owners can change without triggering the dissolution of the company. A member’s death, retirement, or withdrawal from the company for any other reason does not mean that the company must cease to operate.
Most state laws governing LLCs provide that the company is only dissolved when
- an event specified in the operating agreement occurs
- the members consent to the dissolution
- a judicial or administrative action dissolves the company
In some states, the LLC Act provides that the death or withdrawal of the last remaining member causes dissolution. But even in these states, the LLC can provide that a new member will be appointed to continue the LLC.
