Starting a Small Business: Limited Liability Companies

• Email
• Share
• Print

By now, you may be wondering if there's a way to have your cake and eat it, too. You'd like to have the limited liability that corporations enjoy, but it'd sure be nice to have the flexibility and better tax treatment of partnerships. It's exactly with this thought in mind that limited liability companies were created.

Limited liability companies, or LLCs for short, combine many attributes of partnerships and corporations. Like corporations, LLCs must register with the secretary of state and pay appropriate fees. There are annual reporting requirements and other formalities that must be observed. However, like partnerships, LLCs are fairly flexible. Owners of LLC interests, who are called "members," can delegate tasks among each other and create LLC agreements that document the responsibilities of the members to each other. Limited liability companies are also generally entitled to the same favorable tax treatment that partnerships enjoy, owing no tax at the entity level and passing any tax liability down to the owners.

For the most part, the LLC delivers on its promise of the best of both worlds in combining the positive attributes of partnerships and corporations. Because the LLC is a relatively new invention, coming into use in the early 1980s, business law experts were initially hesitant to use LLCs for large businesses. A look at publicly traded companies shows that most of the largest companies still elect to take corporate form, even with the disadvantageous tax treatment. Part of the disincentive to switch also comes from recent reductions in tax rates over recent years. If corporate tax rates ever increased substantially, then the incentive to take LLC form in order to avoid the tax would increase along with them. There are, however, a few publicly traded LLCs, including Enbridge Energy Management (NYSE: EEQ) and real estate management company W.P. Carey (NYSE: WPC).

Your business is an extension of who you are. By choosing the correct type of entity for your needs, you can help to ensure that your business will start off on the right foot. For more discussion of small businesses and the choices they face, take a look at the Motley Fool's discussion board for small business owners.

For additional articles in the series:

• Starting a Small Business
• Starting a Small Business: Partnerships
• Starting a Small Business: Corporations

To learn the ins and outs of issues relating to retirement, try a risk-free trial for 30 days to Rule Your Retirement .

Fool contributor Dan Caplinger welcomes your comments. He doesn't own shares in any of the companies mentioned in this article.