Most business formation services emphasize two key benefits of an LLC:
            1. The owners of the company are protected from personal liability for business debts, and
            2.  An LLC is not subject to double taxation as a regular corporation is.

These are very important reasons to consider operating a business as an LLC as oppossed to the Corporate form of business, BUT possibly the very most important benefit of the limited liability company is its ease of operation and the reduced formality involved to maintain the limited liability characteristics of the company. An LLC can be legally operated and preserved with much less effort and formality than a corporation. This makes it much more difficult for a creditor or plaintiff to hold owners of the business personally liable, which is the primary reason for setting up a formal business organization in the first place - to insulate owners from personal liability.

Here is an actual example to demonstrate this point. (opens in new window).

An entreprenuer incorporates his business by filing Articles of Incorporation with the state. His corporation is legally formed. He then enters an advertising contract on behalf of the corporation. The advertising is so expensive that the company barely turns a profit after the first year. At the end of the first year, he renews the advertising contract for another 12 months. Business does not get better, and in the middle of the second year, the businessman decides to close business. Since the time of filing the Articles of Incorporation, the businessman did not adopt corporate bylaws, nor did he hold an annual meeting of shareholders, nor did he hold an annual meeting of directors. After six months of nonpayment, the advertising publisher files a lawsuit for the money owing on the balance of the advertising contract, alleging that the businessman is personally liable. The businessman files an Answer to the lawsuit stating the debt is an obligation of the corporation and requests he be dismissed from the suit.  The creditor (advertising firm) then files a subpoena demanding to review the corporation's books and records, including the corporation's bylaws, and minutes of meetings of shareholders and directors. When the businessman cannot produce such records, the plaintiff simply points out that since the businessman did not keep the required records, he did not OBSERVE CORPORATE FORMALITIES, and since these formalities were not properly followed, the corporate entity is non-existent, and he is therefore personally liable.

What was the end result? The advertising publisher offered to "settle" for 75 cents on the dollar, and to avoid the expense of retaining an attorney, the businessman accepted.  Had the businessman followed corporate formalities, by adopting bylaws and keeping required records, the creditor would have been unsuccessful in collecting the debt.  But unfortunately, like most small business owners who "incorporate", this businessman failed to observe corporate formalities, either from not knowing any better, or from simply not having time to deal with the paperwork.

The best alternative for this person, probably would have been to form a limited liability company, rather than a corporation.  With an LLC, there is no requirement to keep bylaws or minutes of meetings of shareholders and directors.  Once an LLC is legally formed, it is virtually impossible for a creditor or other plaintiff to challenge the validity of the company and hold the owner(s) personally responsible for business debt.