Please ensure Javascript is enabled for purposes of website accessibility

Starting a Small Business: Limited Liability Companies

By Dan Caplinger – Updated Mar 7, 2017 at 4:37PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Establishing your business as an LLC can solve both liability and tax issues.

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:

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.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

W. P. Carey Inc. Stock Quote
W. P. Carey Inc.
WPC
$78.47 (-0.91%) $0.72

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.