Limited Liability Company

This business structure is commonly seen as a hybrid of a corporation and a partnership. The LLC is good for entities that want to be taxed as disregarded entities or partnerships, that want to reward investors with a larger return of the profits, and for those who do not need the formalities that come with corporations. LLCs are frequently used to hold assets, such as real estate, equipment, or other property.

One of the main features of an LLC is that it offers limited liability protection to its owners, known as members. This means that the personal assets of the members are generally not at risk if the LLC is sued or incurs debt.

Limited Liability Company

The terminology for LLCs is different than other legal entities. The LLC owners are referred to as “members.” The LLC may also have “managers” who operate the business. The LLC can be governed by either members or managers. Typically, the owners opt for “manager-managed.” This can help the members avoid liability for management acts that might not fall within the protections offered by the LLC. The managers are similar to the “officers” and “board members” for a corporation.

The ownership of an LLC is described either by “units” or “membership percentages.” This terminology differs from “shares” of “stock” in a corporation. It also differs from “partnership interests” in a partnership.

The governing document for an LLC is usually a “Company Agreement” or “Operating Agreement.” These documents are similar to “By Laws” for a corporation. They set out the rights, duties, and obligations of the parties and explain how the LLC is to be operated.

Potential Benefits of Forming an LLC

There are several potential benefits to forming an LLC:

  1. Limited liability: One of the main advantages of an LLC is that it offers limited liability protection to its owners, known as members. This means that the personal assets of the members are generally not at risk if the LLC is sued or incurs debt.
  2. Flexibility: LLCs offer more flexibility than corporations in terms of management and ownership structure. LLCs can be managed by the members themselves or by appointed managers, and the ownership structure can be customized to meet the needs of the business.
  3. Pass-through taxation: LLCs are generally taxed as “pass-through” entities, which means that the LLC itself is not taxed on its profits. Instead, the profits and losses of the LLC are passed through to the individual members, who report them on their personal tax returns. This can be simpler and more tax-efficient than other business structures.
  4. No restrictions on ownership: There are no restrictions on who can own an LLC, and LLCs can have any number of members. This can make it easier for businesses to bring on new owners or investors.
  5. Simplicity: Forming and operating an LLC is generally simpler and less costly than forming and operating a corporation.

Potential Drawbacks of an LLC

There are several potential drawbacks to consider when forming an LLC:

  1. Limited liability may not be absolute: While LLCs offer limited liability protection to their members, this protection may not be absolute. In some cases, members may still be held personally liable for the debts and obligations of the LLC if they personally guarantee a debt or engage in negligent or fraudulent actions.
  2. Self-employment taxes: Members of an LLC are typically considered self-employed, which means that they are responsible for paying self-employment taxes on their share of the LLC’s profits. This can be more costly than paying taxes as an employee of a corporation. Of course, the LLC can make an election to be taxed as a corporation to avoid this drawback.
  3. Limited ability to raise capital: LLCs may have more difficulty raising capital through the sale of stock compared to corporations. This can make it more challenging for LLCs to fund their operations or expand their business.
  4. Lack of prestige: LLCs may not have the same level of prestige as corporations, which can be a disadvantage for businesses that want to project a professional image or attract customers and partners.
  5. Complexity: While LLCs are generally simpler to form and operate compared to corporations, there are still specific rules and requirements that must be followed. It’s important to understand and comply with these requirements to ensure that your LLC is operating properly.

How to Form an LLC

To form an LLC, you will need to follow the steps below:

  1. Choose a name: Choose a unique name for your LLC that is not already in use by another organization in your state. You may need to check with your state’s secretary of state or business registration agency to see if the name you want is available.
  2. File articles of organization: File articles of organization with the appropriate state agency, typically the secretary of state. The articles of organization should include the name and purpose of the LLC, the names and addresses of the members, and any other required information.
  3. Draft an operating agreement: Draft an operating agreement for your LLC, which outlines the rules and procedures for how the LLC will be governed and run. The operating agreement should include information on the management structure of the LLC, the rights and responsibilities of the members, and any other relevant details.
  4. Obtain any necessary licenses and permits: Depending on the nature of your business, you may need to obtain licenses and permits to operate legally. Check with your state and local authorities to find out what licenses and permits are required for your business.
  5. Comply with ongoing reporting requirements: Once your LLC is formed, you will need to comply with any ongoing reporting requirements, such as filing annual reports or financial statements, and paying any required fees.

It’s important to carefully consider the potential benefits and drawbacks of forming an LLC before making a decision. Contact us to get more information and advice on the suitability of an LLC structure for your situation.