The Limited Liability Company (LLC)Why Choose an LLC For Your New Business?

Key Takeaways:

LLCs are the business entity of choice for most for several reasons, including:

·         The formalities and management of LLCs are straightforward;

·         LLCs allow pass-through taxation;

·         LLCs limit personal liability; and,

·         LLCs offer personal asset protection.

Most new businesses that we form are limited liability companies, except companies that intend to raise venture capital and private equity monies. The most important reason is that LLCs are flexible and do not require the corporate formalities of corporations. LLCs have a simple and flexible management structure (you choose Member-Managed or Manager-Managed), and—if structured properly—the operating agreement that governs an LLC is easily amendable and allows for flexible ownership. LLCs are easy to set up and the process of making small changes (like adding a DBA or changing an address) are generally simple tasks performed quickly with your state’s secretary of state.

One of the reasons LLCs are so flexible is because of the operating agreement. Operating agreements are what governs the financial and functional operations and the management structure of the business. As previously discussed, LLCs allow for both Member-Managed and Manager-Managed businesses, which sets forth how decisions are to be made within the business. Typical provisions included in an operating agreement include, but are not limited to, management, ownership units, voting rights, powers and duties of the members and managers, distribution of profits and losses, buyouts and buy-sell rules, and disposition at disability or death. Operating agreements are easily amendable and allow for the flexibility discussed previously.

LLCs also offer “pass-through taxation.” Pass-through taxation eliminates the “double taxation” of a corporation because business profits are “passed through” to the owners and not subject to the “corporate tax.” Corporations (not S-corps, however) are taxed on the profits of the business at the end of the year, and then dividends to you as an individual shareholder are taxed at either the ordinary income rate or capital gains rate (depending on how long you’ve held the ownership). Most companies—and the vast majority of small businesses—in the United States are LLCs taxed as S-Corporations, which provides tax advantages that any good accountant would recommend. All around, LLCs have more flexibility when it comes to taxes.

Finally, LLCs offer you personal asset protection and limit your liability, which is the main reason for most people to bother with creating a legal entity. LLCs are a separate legal entity from its members, and so long as you treat the company as a separate entity (i.e., it’s not your personal piggy bank), have proper insurance to cover foreseeable events (i.e., doctors need medical malpractice and truckers need auto insurance), and do not do illegal activities, LLCs generally provide protection from company creditors pursuing your personal property. Thus, generally, members of an LLC are not personally liable for the debts and liabilities of the business and the legal obligations of the LLC do not put a member’s personal assets, such as houses, cars, bank accounts, etc., at risk.

We have lots more that we have learned in our decade of representing startups and small businesses; however, if you’ve read this far you’re probably a go-getter, so if you want to learn how to form an LLC yourself, check out our 100% free New Business Formation Guide. If after reading you still have questions or want some help discussing the complexities, schedule a 30-minute consultation for $98 so we can get your great business idea on the right track.

Written by Logan Koehring; edited by J. Brandon Johnson and Jacob Bishop.