An LLC can be formed by a single owner or multiple members (owners).
The main advantages are: (1) it protects all owners from monetary debts and legal claims; (2) there are no ongoing formalities requires such as annual board of director meetings; and (3) it provides a flexible management structure and distribution or profits and losses.
Although an LLC protects all owners from monetary debts and legal claims, owners who make personal financial guarantees even in conjunction with the LLC, are personally liable to a creditor.
The LLC provides a flexible management structure and distribution or profits and losses. Members can manage the LLC themselves or they can hire a manager who may or may not be a member. They can also compensate certain members more than others, for example members who contribute more capital. This is called a “special allocation,” which the LLC must justify. Corporations cannot do this.
LLC taxes flow through to the owners, but the LLC can also choose to be taxed like a corporation. What about double taxation? Depending on the members' circumstances and personal income brackets, choosing to be taxed like a corporation for a period may save them money. Normally, the IRS treats one-member LLCs as sole proprietorships and multiple-member LLCs as general partnerships. This simplicity in paying taxes only once and on their individual income tax return, together with the limited liability, makes LLCs very popular.
LLCs are a good fit for certain types of members. If members want to run the business themselves, as opposed to hiring outside managers, then a low number of members would be ideal. Too many members, each running the business, might prove to be unmanageable. Because many members initially have other employment while they are getting their LLC off the ground, the pass-through taxation would allow them to use the LLC losses to offset their other income. Also, if a business will hold appreciating assets, such as land, an LLC will allow members to avoid double taxation upon dissolution.
Keep in mind that the limited liability works in one direction. Members are not liable for the debts of the LLC. However, members who default on personal debts might be forced to surrender their financial interests in their LLC. A court might order this to satisfy a claim or debt.