An LLC will reduce liability for a part-time consulting business, or any full time business.
The simple definition of a limited liability company (LLC) is that it is a form of business entity that limits the liability of its owners from creditor claims (lawsuits) while allowing flexibility in operation and management and passing through its income to its members with no tax at the entity level.
Basic Features of an LLC
The basic features of a limited liability company are:
• Its owners have limited liability for the entity’s debts and obligations, similar to the status of shareholders in a corporation, and
• Its income and losses are normally passed through to the owners as if it were a partnership, avoiding double taxation.
The LLC is like a limited partnership, but without the requirement that there be at least one general partner liable for the debts and obligations of the partnership. An LLC is a statutory creation. That is, unlike general partnerships which developed under common law, an LLC, like a corporation, is created by filing a document (called Articles of Organization) with the Corporation Commision. As the LLC is a statutory entity, the laws governing the LLC set up a particular framework of rules for the operation and management of the LLC. Generally, most of the statutory rules are considered to be fallback provisions which take effect only if the LLC’s operating agreement doesn’t provide for guidance on a particular point. We will need to customize an operating agreement for you.
A limited liability company (LLC) has many advantages as a form of business entity:
• Pass-through taxation – under the default tax classification, profits are taxed at the member level, not at the LLC level (i.e., no double taxation).
• Limited liability – the owners of the LLC, called “members,” are protected from liability for acts and debts of the LLC.
• No requirement of an annual general meeting for shareholders.
• No loss of power to a board of directors
• LLCs are enduring legal business entities, with lives that extend beyond the illness or even death of their owners, thus avoiding problematic business termination or sole proprietor death.
• Much less administrative paperwork and recordkeeping than corporations or limited partnerships.
• Membership interests of LLCs can be assigned or transferred.