Forming a limited liability company (LLC) is an important step for small business owners, and taking this step has many possible benefits for the business and its owners (who are also called members or managers). These benefits are, in many cases, unavailable to sole proprietorships and general partnerships.

Advantages of LLC formation include:

Limited Liability - LLCs provide limited liability protection to its owners. Typically, the owners are not personally responsible for the debts and liabilities of the business; thus, creditors cannot pursue owners’ personal assets (such as a house or car) to pay business debts. Conversely, in a sole proprietorship or general partnership, owners and the business are legally considered the same and personal assets can be used to pay business debts.

Pass-through Taxation - LLCs typically do not pay taxes at the business level. Any business income or loss is "passed-through" to the owners and reported on the owners’ personal income tax returns. Any tax due is then paid at the individual level.

Establishing Credibility - Forming an LLC may help a new business establish credibility with potential customers, employees, vendors, and partners.

Fewer Ongoing Requirements - LLCs face fewer state-imposed annual requirements and ongoing formalities than do corporations.

Organizational Structure - LLCs are free to establish any organizational structure agreed upon by the owners.

Few Ownership Restrictions - There are few restrictions on who can be an owner of an LLC or how many owners an LLC may have, unlike S corporations.