Because an LLC is considered a separate legal entity from its members, its financial and legal responsibilities are also its own. So, if someone sues the business or the company cannot pay its debts, the LLC members are typically not held responsible. Therefore, their personal assets are at a lower risk of being seized to pay legal damages or settle debt than they would be if the business were a Sole Proprietorship or Partnership.

By default, a Limited Liability Company is considered a “disregarded entity” for tax purposes. As such, income tax is applied in the same way as it is to Sole Proprietorships and Partnerships. Business income and losses are passed through to its members’ tax returns and are subject to members’ individual tax rates. An LLC has other tax treatment options, too. Members can opt for an LLC to be taxed as a corporation, with profits taxed at its corporate rate. Or members of an LLC can choose S Corporation election, which allows for the LLC to have pass-through taxation but with the corporate benefit of a reduced self-employment tax burden because members only pay Social Security and Medicare taxes on their income taken as salaries; members’ dividend income is not subject to self-employment taxes.