So You Want To Form a Limited Liability Company…

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When you decide to start a business, one of the first decisions you’ll make is how to  actually structure the business.

Will you be a sole proprietor?

Will you form a partnership?  A corporation?

Or will you opt for the popular Limited Liability Company (“LLC”) formation?

Limited Liability Company or “LLC” is a business structure allowed by state statute.  One reason for their popularity is the feature  that  limits the personal liability of the members for the debts and actions of the company.

Another reason for the LLC’s popularity is the relative ease of formation.  In most  states, you need only file Articles of Organization with the Secretary of State and draft an Operating  Agreement.  However, some states do require a few additional steps, such as publication of a notice of formation, California is not one of those states.

Beyond the requirements for actually forming the LLC, there are a few other things to think about before you decide to make your business a Limited Liability Company.  Here are a few pros and cons:

The Good News

The owners are referred to as Members, not partners or shareholders.  The number of members is unlimited, you can name as few as one member (making your business a single member limited liability company), or any number you choose.  Beyond flexibility of management structure and the limited liability of members, some of the other advantages of the Limited Liability Company are:

Flexible Profit Distribution – Commonly, a general partnership requires profits to be distributed equally among partners.  An LLC does not require an equal distribution among the members.

No Corporate Minutes – If you form a corporation, you are required to keep formal minutes, have meetings, and any action of the corporation requires a formal resolution.  While that may not sound like a big deal, you would be surprised how many corporations are lax in actually meeting these requirements, and that can lead to a myriad of problems down the road.  A Limited Liability Company does not require minutes, meetings or resolutions which makes them much easier to operate and maintain.

Flow Through Taxation – Your business profits, losses and expenses can flow through the company to the individual member or members, depending on the tax elections you make.  When you chose to have your profits, losses, and expenses to flow through to the members you avoid double taxation of paying corporate and individual taxes.  As a general rule, this is a serious advantage.  However, some of the IRS requirements have changed, particularly regarding the way Single Member Limited Liability Companies report, collect and pay employment taxes if they actually have employees.  Call us to talk about what you need to do to make sure you’re in compliance with the IRS regulations that took effect on January 1, 2009.

The Not So Good News

Here are a few of the down sides of the Limited Liability Company formation:

Your LLC May Not Live Forever – If you form a corporation, your business structure can survive your death or personal bankruptcy.  However, if you choose an LLC, it will be dissolved if you die or file bankruptcy, which means it isn’t a company you can leave to your heirs.

No Stock to Sell – If you plan to take your business public or issue shares at some  point in the future, you will want to form a corporate entity.  LLC’s do not issue shares and are privately held.  If you have big plans for your business to be the next Microsoft, you would probably be better served by starting out with a corporate business structure.

Taxation Designation – When you start your Limited Liability Company, if you have more than one member, you will have to file Form 8832 with the IRS and designate exactly how you want to be treated for taxation purposes.  You can elect to be classified as a corporation or a partnership.  If you only have one member you can be classified as a corporation or a single member “disregarded entity”.  Any of these classifications carries with it specific requirements and can make a big difference in the how your taxes are calculated and paid.  Don’t make this designation without talking to us first.

One More Word To The Wise

If you are considering forming a single member LLC, you might want to reconsider and actually add another member.  A recent Florida Supreme Court ruling and the actions  of two different bankruptcy courts have used a flaw in the single member structure to allow creditors to take over and liquidate it if the single member is sued personally.  Since there are no other members’ investments or assets to protect, the protections that would normally apply to the member’s investment don’t apply to the single member LLC.  If you are sued, and you’re the only member and it won’t affect anyone else, the company’s assets are fair game.  If this is a concern for you, you should talk to an attorney about asset protection strategies and proper venues for your company that will lessen your exposure.

If you’ve given all these issues full consideration and you decide that a Limited Liability Company is the right choice for your new business, make sure you understand everything that is required of you and all the possible tax implications.

Do you think a Limited Liability Company would be the right choice for you?

And just as with any other process with serious potential for legal issues down the line, always consult an attorney to determine what’s best for you.  Contact us to schedule your comprehensive Business Building Benchmark today so we can identify the best course of action for you.  N

Creative Commons License photo credit: akunamatata

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Written by Integrated General Counsel

Our focus includes handling a variety of corporate matters and also includes litigation in state and federal courts. Our current practice includes providing transactional services and representing a variety of small and medium-sized companies as their outsourced general counsel.