Accountants, attorneys and fellow entrepreneurs will sometimes tell you that a limited liability company offers less legal protection than a traditional corporation.

I'm not an attorney. But I have taught graduate-level tax classes about limited liability companies to certified public accountants and attorneys, and I have worked on LLC formations with dozens of attorneys hundreds of times. And I think the statement that a limited liability company offers less protection than a corporation is pure poppycock. In fact, I would take the expertise of anybody who reflexively suggests this with a grain of salt.

But let me explain my rationale with a little detail. The people who say that a limited liability company offers less legal protection fail to note two critically important features of the LLC option:

Reason one LLCs Arguably Offer Better Protection: Less Room for Mistakes

By legislative design, a limited liability company is less complex to operate than a corporation. A limited liability company only requires that its owners follow a simple operating agreement.

In comparison, a corporation needs to have regular shareholder meetings. Corporations require by-laws which, in turn, require a governing board of directors. This corporate board of directors ought to meet regularly. The board of directors appoints and then oversees corporate officers who operate the business on a daily basis.

A corporation was originally intended to allow passive investors to place money into business ventures operated by professional managers. Corporations were not designed with the small business owner in mind. And what that means is that you've got more corporate red-tape and more stuff you can get wrong.

Arguably, you may get better legal protection with an LLC simply because you're less likely to "break" the LLC.

Reason two an LLC Probably Offer Better Protection: Charging Orders

Another feature often missed when people talk about the legal protection afforded by a limited liability company concerns "charging orders:"

In any state, your creditors may be able to gain ownership of the shares you own in a corporation. These could include the shares in your small business corporation that you work in to support your family. Obviously, that's not good. If a creditor gains ownership of a majority of the shares in a small business corporation, they control the corporation. That may mean a creditor controls your job.

However, in many states (particularly Western states), creditors cannot gain ownership of your interest in a limited liability company. In these states, the creditor's only option is a "charging order." A charging order, which a judge issues, says that if the limited liability company distributes money to a particular member, that money should instead go to the member's creditors.

That also sounds pretty bad. But think about what the charging order leaves you with. A member creditor can't get money from the LLC unless the LLC decides to make a distribution. (Maybe the LLC will decide not to distribute funds, which means creditors won't be able to get anything out of the LLC.) And the LLC still gets to operate in the way that makes most sense for the business conducted inside the LLC. As compared to a small business corporation, the LLC may be able to offer the individual LLC member and the LLC itself extra legal protection.

(Note: The "charging order" angle may not provide protection for single-member, or one owner, limited liability companies.)

Summing up, the limited liability company probably does offer at least equal and quite possibly better legal protection than a regular corporation. You are less likely to screw up a limited liability company's legal protection. In some cases, shares in a small business corporation aren't as well protected as a business owner's interest in a legal liability company.

Seattle tax accountant Stephen Nelson holds an MBA in Finance from the University of Washington and an MS in Taxation from Golden Gate University. He also contributes to an LLC FAQ where his recent columns have covered when a business is too small to form an LLC and using S corporation tax treatment for a limited liability company.