So you’ve decided to start a business and you’ve heard you need to choose a business structure. You’ve also heard a lot about LLC’s being relatively easy to establish and maintain with advantages over a sole proprietorship, partnership, or corporation.
A Limited Liability Company or “LLC” is a business structure permitted under state law. A major advantage of an LLC is evidenced by it’s name: Limited Liability, which limits your personal liability for the activities and debts of the LLC.
An LLC is fairly easy to set-up. For most states you file Articles of Organization with the Secretary of State. It also a very good idea to draft an Operating Agreement which simply establishes a framework for how the LLC will be run, authority of the members, requirements of members, how profits will be disbursed, just to name a few.
Beyond the initial filing of the Articles of Organization, there are a number of other items to consider before you set-up a Limited Liability Company. Here is a brief overview of some of the pros and cons:
The Good News
The owners of the LLC are Members, not partners or shareholders. The number of members is unlimited. The LLC can have only one member or as many members as you choose. Other pros:
Flexible Profit Distribution – Partnerships usually require profits and liabilities to be split equally between the partners, while an LLC does not require this equal split. The split of profits and losses can be in any formula you choose.
No Corporate Minutes – Corporations are required to keep formal minutes, have meetings, and any material action of the corporation requires a formal resolution. These requirements for a corporation are critical to avoid a piercing of the corporate veil, which will subject you to personal liability. An LLC has no requirement for annual minutes, meetings or resolutions. While this makes them much easier to operate and maintain, it is still a good idea to have such practices, but if you don’t it doesn’t violate any legal principle.
Taxation Flows Through to the Members – All of the profits and losses flow through the LLC to the individual member or members. This avoids the notorious double taxation corporations are subject to. This is a serious advantage. Yet, there are some IRS requirements particular to Single Member Limited Liability Companies which pertain to employment taxes if they actually have employees.
The Bad News
LLC May Have a Required End Date – Corporations can go on forever. Think of Ford or Disney. Each of these companies have continued beyond the life of their visionaries, not so with an LLC. Unless other arrangements are established in the Operating Agreement, general an LLC will be dissolved if you die. LLC’s have a finite life.
No Stock to Sell – If your dream is to build a business and take it public you don’t want to form an LLC. LLC’s are privately held and members own “interests” in the company. If you desire to go pubic a corporation may be a better choice for your entity.
You Must Choose How the LLC is Taxed – If your LLC has more than one member, you will need to file Form 8832 with the IRS. This form allows you to designate whether you want to be taxed as a corporation or a partnership. A single member LLC can be classified as a corporation or a single member “disregarded entity”. These choices all determine how your taxes are calculated and paid. Don’t make this designation without talking to us first.
These are some of the significant issues regarding an LLC. If you decide that a Limited Liability Company is the right choice, make sure you understand what all the requirements are and the potential tax implications.
With everything that has potential legal issues, always consult an attorney. Call us to schedule your comprehensive business analysis which explores the foundation of your business in the critical areas of legal, insurance, financial and tax today so we can identify the best course of action for you. Normally, this session is $1250, but if you mention this article and we still have room on our calendar this month, we will waive that fee. Give us a call at 800-503-0699!!
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