Paralegal Advanced Competency Exam (PACE) Practice Exam

Which business structure is often favored by small business owners for its flexibility?

1. Corporation

2. Sole Proprietorship

3. Limited Liability Company (LLC)

4. Joint Venture

The correct answer is: Limited Liability Company (LLC)

The Limited Liability Company (LLC) is favored by small business owners due to its combination of flexibility and protection it offers. Unlike corporations, which come with more rigid management structures and regulatory requirements, an LLC allows owners (referred to as members) to manage their business with greater freedom. This includes making decisions without the formalities required in a corporate setting. An LLC provides the benefit of limited liability, meaning that the personal assets of the members are generally protected from business debts and lawsuits, similar to a corporation. However, it also allows for pass-through taxation, where profits and losses can be reported on the members' personal tax returns, avoiding the double taxation that sometimes occurs with corporations. This structure's adaptability extends to the management style as members can choose to manage the business themselves or appoint managers, providing a degree of operational flexibility not found in more traditional business forms. Additionally, LLCs have fewer compliance requirements than corporations, making them more appealing for small business owners who may prefer to focus on running their business rather than dealing with extensive regulatory obligations. In contrast, while a sole proprietorship is also flexible, it does not offer the same level of liability protection that an LLC does. Corporations offer liability protection but require more formal procedures and are less