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Thinking of Forming an LLC? 4 Big Benefits

By: Martin Eckler

 

a team of entrepreneurs forming a business

If you’re starting a business and considering forming an LLC (limited liability company), you should know that you’ll be in good company. Many well-known companies are structured as LLCs because of the benefits they offer.

Here we’ll discuss those benefits and surprise you with some well-known LLCs.

Benefits of forming an LLC

Personal Liability Protection

An LLC offers personal liability protection for owners, called members, because unlike a sole proprietorship or general partnership, the LLC is considered an entity that is separate and distinct from its members. It can have its own debts and obligations for which the members are not personally liable.

That means that if the LLC cannot pay its debts or is sued, members’ personal assets are not at risk.

Some exceptions to personal liability protection apply. If a member acts recklessly or fraudulently in the course of business, they could be liable for damages.

Additionally, if a member personally guarantees a business loan for the LLC, they are personally liable for that debt if the LLC cannot pay.

Pass-Through Taxation

Unlike a corporation, an LLC is a pass-through entity, meaning that profits are passed to the members and taxed at their personal tax rates. The LLC does not pay taxes, unlike a corporation, which is subject to corporate taxes.

Management Flexibility

Corporations are subject to many requirements, such as electing a board of directors and appointing corporate officers. By forming an LLC you’ll have no such requirement, and members can manage the business in any way they choose.

An LLC does, however, have to be designated as member-managed or manager-managed.

In a member-managed LLC, all members are active managers of the LLC, and are the only people who have the management power to sign contracts, handle bank accounts, or act in other ways on behalf of the LLC.

In a manager-managed LLC, three different situations may apply.

  •         Some members are appointed as managers, while others do not have management powers and are essentially silent partners.
  •         All members are managers, and a non-member or members are also given management powers.
  •         No members are managers, and non-members are the managers of the LLC.

Profit Distribution Flexibility

In most businesses, profits are distributed based on the owner’s share of ownership. In forming an LLC,  members can choose how profits are distributed. For example, if one member is a manager while another member is not, the managing member may receive a higher profit distribution.

Major Companies That Have Formed LLCs

Here are some  well-known LLCs  that took advantage of those benefits.

  1.     Google

Google’s parent company is Alphabet Inc, and Google LLC is a subsidiary of that parent company. Surprise! Even a huge, multinational company that’s part of our daily lives chose to form as an LLC.

  1.     Amazon

While Amazon is a corporation, they own Amazon.com Services LLC as a subsidiary. Amazon also has other subsidiaries that are set up as LLCs.

  1.     Anheuser Busch

Every time you drink a Budweiser, you’re drinking a product of an LLC, Anheuser Busch, LLC. It’s a subsidiary of Anheuser Busch InBev and is the largest brewing company in the United States.

  1.     Westinghouse Electric Company

Westinghouse Electric Company LLC is the nuclear power subsidiary of Westinghouse Electric Corporation. The company employes more than 9,000 people.

  1.     Hertz

Hertz Global Holdings Inc. has several subsidiaries that are LLCs, including Hertz Car Sales LLC, Hertz Vehicle Financing LLC, and Hertz Vehicles LLC.

  1.     IBM

International Business Machines (IBM) Corporation also owns several subsidiary LLCs including IBM International Group Capital LLC.

  1.     Sony

Sony Inc. is the parent company of Sony Entertainment LLC which offers Sony’s video games and digital entertainment products.

In Closing

While the decision in forming an LLC for such large companies is undoubtedly more complex than that of your average small business, the benefits of an LLC are clear no matter what the company size. LLCs offer personal liability protection, pass-through taxation, and management and profit distribution flexibility, all of which make LLCs a popular choice among entrepreneurs.

Published: August 24, 2023
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Martin Eckler

Martin Eckler is a legal advisor for Stepbystepbusiness, a proud team of serial entrepreneurs and business writers. They aim to help new business owners with their experience and free online guides, to spread the word to a broad audience of entrepreneurs.

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