Take Cover More and more closely held companies are getting cozy with the LLC, but is a limited liability company right for you?

For the LLC, it's been a relatively long road to popularity. When the limited liability company first appeared in the '70s, the tax and legal rules governing it were too confusing and onerous to make it an attractive option. In the '90s, after the IRS both clarified and simplified some of those rules, businesses began cautiously considering it.

Today, closely held companies are beginning to show a clear preference for the LLC, according to the latest data from the International Association of Commercial Administrators. LLC filings jumped in almost every state from 2004 to 2005, while corporate filings declined. "The tax benefits are becoming more clearly understood, the legal protection is there and people are getting more comfy [with the LLC]," says Dan Meehan, tax partner with New York City's J.H. Cohn. "And there are a lot of practitioners who didn't really understand LLCs and are now getting more familiar with [them]."

Add to that the fact that many sole proprietors, who for years were satisfied with a less formal status, are seeking protection in an increasingly litigious environment. "A decade ago, it was the norm to be a sole proprietor and view incorporating as unnecessary," says Troy Janisch of Madison, Wisconsin-based BizFilings, an internet company that provides incorporation services. But with greater exposure to lawsuits and more personal assets at stake as a result, many business owners are seeing the advantages to incorporating. And when faced with the choice of the LLC or its popular alternative, the S corporation, most opt for the former.