Types of Ownership

• Most basic finance courses will describe ownership of an interest as being one of three types. Sole proprietorships are under the complete control and ownership of an individual. There is no legal division between the personal finances of the owner and the debts and assets of the business. A partnership is similar, but involves more than one person. Each person shares the assets of the interest, but also is responsible for the debts, legal judgments or other liabilities. A corporation is controlled by a board of directors who elect executive officers. These officers hire lower-level managers, supervisors and labor. The firm itself is actually owned by the stockholders who elect and dismiss the board of directors. The corporation is a legal and economic entity to itself and the personal assets of the owners (stockholders) cannot be accessed by the corporation's creditors.
  
  

Limited Liability

• The LLC represents a hybrid type of ownership containing features of each of the above. Though sometimes erroneously called a limited liability corporation, this is incorrect, as the LLC does not issue stock, the most defining feature of corporations. This mistake probably results from the feature of an LLC providing limited liability. The owner of a sole proprietorship is responsible for all the financial liabilities of the business.
  
  This is most important with regard to lawsuits or legal judgments. Should judgment be levied against a firm that exceeds its value, the owner will have to pay from his personal assets (indeed, in this structure, all the firm's assets are the owner's personal assets). In the corporate structure, the corporation must still pay and may even enter bankruptcy proceedings as a result. But, the stockholders' personal assets are safe. The LLC is more similar to the corporate model in this regard. Be advised, however, that courts can "pierce the corporate veil" and are more prone to do this with LLCs than corporations.
  
  

Control

• The control of the LLC is more similar to sole proprietorships. As LLCs do not issue stock, there are no shareholder votes to consider. Corporations are controlled principally by a board of directors, while LLCs may not have them. LLCs owned by a single person are controlled in all respects by that person alone. LLCs may also be owned jointly by more than one person and this increases complexity, but each partner is only liable to the extent that he has invested in the company.
  
  

Taxation

• Taxation of LLCs presents considerable flexibility. An LLC owned by an individual usually functions as a pass-through entity. The tax authorities disregard the LLC and the owner claims all its net income as his own. Multiple owners of an LLC file taxes as a partnership, using the same forms as a partnership that is not an LLC. Alternatively, an LLC can file taxes as a corporation. Though this will involve the LLC paying taxes as an entity unto itself and subsequent payment of taxes by the owners on their income from the LLC ("double-taxation"), it is sometimes indicated for legal or business reasons.
  
  

Drawbacks

• Problems with LLCs often involve the nature of ownership. Because stock is so easily transferable, ownership of corporations does not present this trouble. Also, while LLCs demand less paperwork and are subject to less government regulation, this lack of regulation means that LLCs are not as uniformly recognized by various jurisdictions. Some states regard LLCs as an entity distinct from its owners. Others hold that they are not. Owners may have to personally guarantee loans, pay higher charter fees than corporations, publish notice of the LLC's formation or comply with local laws that mitigate the advantages or impose regulatory hurdles to efficient function.