Like a corporation, a limited liability company or "LLC," is a separate and distinct legal entity. This means that an LLC can get a tax identification number, open a bank account and do business, all under its own name.

One of the primary advantages of an LLC is that its owners, called members, have "limited liability," meaning that, under most circumstances, they are not personally liable for the debts and liabilities of the LLC. For example, if an LLC is forced into bankruptcy, then the members will not be usually be required to pay the LLC's debts with their own money. If the assets of the LLC are not enough to the debts and liabilities, the creditors generally cannot look to the owners for payment. Their debt was with the LLC, not the people that owned the LLC.

LLCs aren't bound by the same rigid rules of corporations, but this doesn't stop them from being just as useful. It doesn't matter if you're a solo business or if you have hundreds of employees, an LLC keeps protecting you while allowing for expansion and growth. With an LLC, there's no requirement for special meetings, extensive corporate records, or many other formalities. Limited liability companies are even flexible when it comes to taxes, offering lots of options so you can create a tax plan that works for you. This simplicity, protection, and ease of use have made forming an LLC a popular choice for small businesses in America.

The decision to form an LLC or a corporation is a common debate among business owners that deserves careful consideration. While both are excellent choices for personal liability protection, each entity offers its own set of distinct advantages. Choosing the right one for your company depends on your particular business, operational needs and tax strategy.

No ownership restrictions: S corporations cannot have more than 100 shareholders, and each shareholder must be a U.S. resident or citizen. There are no such restrictions on LLCs. Ability to use the cash method of accounting: Unlike C corporations, which often must use the accrual method of accounting, most limited liability companies can use the cash method of accounting. This means income is not earned until it is received. Ability to place membership interests in a living trust: Members of an LLC are free to place their membership interests in a living trust. In the case of an S Corporation, placing shares in a trust can raise issues with the S Corporation status. Ability to deduct losses: Members who are active participants in the LLC's business can deduct its operating losses against the member's regular income to the extent permitted by law. Shareholders of an S corporation are also able to deduct operating losses, but shareholders of a C corporation are not. Tax flexibility: By default, an LLC is treated as a "pass-through" entity for tax purposes, much like a sole proprietorship or partnership. This means that LLCs avoid double taxation. Furthermore, an LLC owner is not required to pay unemployment insurance taxes on his or her own salary. However, an LLC can also elect to be treated like a corporation for tax purposes, whether as a C corporation or an S corporation.

Profits are subject to Social Security and Medicare taxes: In some cases, LLC owners may end up paying more taxes than owners of a corporation. Salaries and profits of an LLC are subject to self-employment taxes, currently equal to a combined 15.3%. With a corporation, only salaries (and not profits) are subject to such taxes. Owners must immediately recognize profits: A C corporation does not have to immediately distribute profits to its shareholders as a dividend. This means that shareholders in a C corporation are not always taxed on the corporation's profits. Unless an LLC elects to be taxed as a corporation, profits are automatically included in a member's income. Unfavorable state tax rules and fees: In some states, including California and New York, an LLC must pay higher taxes and fees than would a corporation that generated the same revenues.