Limited Liability: A Shield for Owners

Limited liability companies (LLCs) offer a significant advantage by ensuring that members are not personally responsible for the entity's debts, contrasting sharply with partnerships, where personal liability exists. Additionally, LLCs benefit from pass-through taxation, meaning the company itself does not pay tax; instead, income and losses are allocated to individual members who report them on their personal tax returns. This tax structure, however, is often disfavored by venture capitalists (VCs) as it complicates their fund operations, prompting a preference for corporations. Consequently, when VCs express interest in an LLC, they typically require a conversion to a corporate structure to align with their investment strategies.