The Limited Liability Company (LLC) started out slow as a business entity. Wyoming, the first US state to implement this form of business ownership, passed legislation in 1977 adopting the LLC. It took another 5 years before the next state, Florida, enacted LLC ownership. Fortunately for many business owners, the LLC adoption spread like wild fire in the 1990s. By 1997 every state and the District of Columbia accepted this form of business ownership; Hawaii was the last state to jump on the LLC band wagon.

A limited liability company offers owners limit liability for a business’ debts and contractual obligations much like a corporation, with a less complicated formation. Unlike a corporation, a LLC passes all income and losses through to its owners like partnerships. Unlike a partnership or sole proprietorship, the creation of a LLC requires a state filing and designation of at least one officer. In a sense a LLC is a hybrid of a corporation and partnership.
 
Below we list some general advantages and disadvantages of the LLC entity. However, because state laws differ, these lists may or may not apply to the state in which you operate.

Advantages of a LLC

• The income from a LLC passes through to the owners, usually meaning a reduced income tax on income and avoidance of the corporation double taxation where income is taxed at the corporation level and again when distributed to individuals.
• Owners of the LLC receive legal protection from the debts and acts of other members of the LLC.
• A LLC requires only one owner (in most states)
• A LLC can continue after the death of its owners
• Setting up and continued operation of a LLC requires far less paperwork than a corporation.

Possible Disadvantages of a LLC

• Income received from a LLC is subject to self-employment taxes
• Sale of more than 50% of the capital and profit of a LLC within a 12 month period terminates the LLC for federal income tax purposes.
• An LLC with losses greater than 35% passed to non-managers of the company may not be able to use the cash method of accounting.
• Each state’s laws regarding the LLC entity differs, possibly creating confusion for entities operating in more than one state.
• An LLC with less than two members is treated not as a partnership but as a sole proprietorship.