By: Barry E. Haimo, Esq.
July 12, 2016
What Is a Limited Liability Company?
When creating a business, you need to decide what type of business you want to be both in terms of the actual business and your business structure.
There are a number of different options when it comes to organizing your business. You could be a sole proprietor or have a general partnership. Or, if you want to incorporate your business, you can form a limited liability company (LLC), a C-corporation, a S-corporation, limited partnership, limited liability partnership or limited liability limited partnership. Every business structure has its own advantages and disadvantages.
We will be looking at LLCs in this post.
A limited liability company is a business structure that may combine pass-through taxation that you get from partnerships and proprietorships with the limited liability enjoyed by corporations. Of all the corporate structures, an LLC is in some ways the least complex, and you only need to have one owner to get started.
As a business owner, you have to think about protecting both your business assets and your personal assets. For that reason, forming an LLC is in your best interest because it prevents an attack on your personal assets from creditors and lawsuits.
Advantages of a Limited Liability Company (LLC)
Pass-through taxes. Although an LLC is a company, it is not considered to be a separate entity from its owners when it comes to taxes. Basically, this means that an LLC will not have to pay its own income taxes like a corporation, which must file a separate income tax return (1120 or 1120s). Instead, the profits “flow through” to the partners and, as a result, the LLC owners report the business’s share of profit and loss on their own personal income tax returns. Doing this helps to avoid double taxation experienced by c-corporations.
Limited liability. Inan LLC, business owners are not personally liable for the business’s liabilities or debts. If a creditor sues the business for not paying a debt, that creditor won’t be able to go after the owner’s personal assets to satisfy the debt. In other words, an LLC separates and protects your personal assets from the business assets.
No residency requirement. Owners of an LLC don’t have to be American citizens or even permanent residents of the United States.
No requirement for annual meetings or record minutes. With an LLC, this is one less thing you have to worry about doing. Nevertheless, it is highly advisable to document your meetings and minutes to substantiate your business operations and purpose.
Credibility. Forming an LLC allows your business to look legitimate and credible. An actual company with LLC in the title might be seen in a more favorable light by lenders, partners, and suppliers.
Flexibility. LLCs are the most flexible entities. They can be taxed in one of four ways: disregarded, partnerships, corporations and s-corporations. In addition, partners in LLCs taxed as a partnership can negotiate with far greater flexibility with respect to the profits, losses, distributions, voting, nonvoting, managerial control, etc. This is not possible in other entities, especially s-corporations.
Management. LLCs can enjoy different types of managerial structures. On one hand, the owners of LLCs, or members, can enjoy a member-managed structure. In this type of structure, the members each act as managerial fiduciaries on behalf of the company. Each member can bind the company and act on behalf of the company. On the other hand, they can be managed by one or more managers as part of a manager-managed managerial structure. This centralized management structure is modeled after the corporate management structure, where shareholders elect directors who, in turn, appoint officers.
Disadvantages of an LLC
While an LLC has many advantages, there are also disadvantages to this type of business structure.
Self-employment tax. In s-corporations, partners only withhold Social Security and Medicare from their paychecks to the extent of their “reasonable salary”. In contrast, 100% of profits are subject to self-employment tax and withholding in an LLC. It is for this reason that you want to own your LLC interest by a s-corporation. .
Lack of uniformity. Different states have different LLC statutes. For this reason, businesses that operate in multiple states may be treated differently from one state to the next, which presents complexities in LLCs doing business in different states
If you want to attract investors to your business, it is likely they will want to be issued shares, which is most commonly done through corporations. That being said, LLCs can be divided into voting and nonvoting units which resemble corporate common and preferred shares of stock in similar ways.
Deciding on a business structure is a big decision. Contact an experienced Florida business planning attorney to help you decide what’s best for you and your business.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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