Utah General Contractors - Business and Law Practice Exam

What type of business structure combines the liability protection of a corporation with the favorable tax treatment of a partnership or sole proprietorship?

1. Corporation

2. Sole Proprietorship

3. Limited Liability Company

4. General Partnership

The correct answer is: Limited Liability Company

The correct answer is the Limited Liability Company (LLC) because it effectively offers the best of both worlds: liability protection and tax benefits. An LLC protects its owners, known as members, from personal liability for the debts and actions of the business, similar to a corporation. This means that if the LLC faces legal issues or financial trouble, the members' personal assets are generally shielded from risk. Additionally, LLCs enjoy favorable tax treatment because they can choose to be taxed as a sole proprietorship or a partnership, allowing profits and losses to pass through directly to the members’ personal tax returns. This avoids the double taxation that typically occurs in C corporations, where profits are taxed at both the corporate level and again at the individual level when distributed as dividends. Understanding the benefits of an LLC is crucial for anyone considering their business structure, as it allows flexibility in management and taxation while also providing robust protection against personal liability. This combination makes LLCs a popular choice for many small business owners.