The LLC (Limited Liability Company) has quickly become a very popular choice of business entity. Many business owners desire to limit their personal exposure and also have the ability to have taxation occur at the business level or individual level. An LLC offers all of this.
An LLC can be formed for any business purpose and can protect business owners from personal liability. Two aspects of an LLC are particularly advantageous for reducing personal liability.
Piercing the business entity
A Corporation is required to comply with corporate legal formalities (ie. shareholder meetings, written minutes, appropriate corporate records, etc). An LLC does not have these formality requirements. This fundamental difference can be a key in imposing personal liability. When a corporation is sued, often the plaintiff’s attorney will immediately ask for a copy of corporate minutes and records. If they are not current and proper, the corporation could be pierced subjecting the individuals to personal liability. Since an LLC does not have these formality requirements piercing cannot occur for these reasons.
The difference between a Corporation and LLC in small business settings is magnified when examining the rights of a creditor of a business owner. A creditor of a corporate business owner can levy on the percentage interest of that owner and may liquidate the corporation to satisfy the levy. In an LLC, there are charging order protections which prevent this even from happening. This means that a creditor of an LLC business owner cannot levy on the business owner’s interest and force a liquidation. The creditor’s exclusive remedy is to obtain a charging order and levy on the distribution rights of the owner.
An LLC offers flexibility for a single member LLC as the LLC can be taxed as a Sole Proprietor, an S Corporation or C Corporation. For a multiple owner LLC the entity can be taxed as a Partnership or a C Corporation or an S Corporation.
A Partnership or Corporation can vote to shed that form of business entity and adopt another (such as an LLC). In essence, the entity is identical before and after the conversion, but the entity is now governed by LLC laws (rather than partnership or corporation laws). Some business decide to do this as a result of the above discussions relating to the advantages of an LLC entity.