As we discussed in our last blog post (What business entity should I choose?), the limited liability company (LLC) has become the “go-to” vehicle for most contemporary business owners. Of all the forms of legal entities available today, the LLC offers the most attractive combination of liability protection, tax savings and organizational flexibility.
What are the advantages of the LLC for your business? Here are five great reasons to choose the LLC as your business structure:
1. Liability Protection.
The most fundamental risk any business owner takes is the risk that the venture won’t succeed. If it fails, the owner will be faced with unpaid bills, unsatisfied customers and insurance, tax and other liabilities. How can you take on this challenge and yet still protect yourself against the unknown risks?
The law provides the answer in the form of certain entities that provide liability protection for their owners. These owners are liable for the amount of their investments, but nothing more; they are not personally liable for the debts of the business. The LLC provides just such protection, as does a corporation or (to a certain extent) a limited partnership. But the LLC offers other advantages as well.
However, the liability protection is not 100% perfect. Take a look at our detailed video and post titled: 4 Simple Steps to Protect Your Business from Piercing of the Corporate Veil.
2. Tax Savings.
A corporation will provide you with limited liability, but you will be taxed twice on its earnings: once at the corporate level, and once at the shareholder level. An LLC, by contrast, is taxed like a partnership: only the individual owners (“Members”) are liable for the business’ taxes. The entity itself is not taxed. Therefore, there is only one layer of tax, and the LLC owners thus achieve significant tax savings (especially if there is a rise in the corporate income tax rate).
Another advantage of the LLC is its flexibility: unlike a corporation, the members of the LLC are free to organize their affairs as they see fit (subject to a relatively small number of statutory rules). Corporations, by contrast, are subject to significant statutory requirements that limit the organizational options available to them. While partnerships, like LLC’s, may be structured by contract, they either lack liability protection (general partnerships), or have structural requirements that make them less nimble than the LLC. For example, limited partners enjoy liability protection and single taxation, but they cannot participate in the business. They’re effectively shareholders. Members of an LLC, by contrast, can fully participate in the management of the business and affairs of the company.
Perhaps the most remarkable thing about an LLC is how straightforward it is to create one. As noted above, there are few statutory requirements in connection with the creation of the business, and once established, it is relatively easy and affordable to maintain. The key is that the LLC is a creature of both statute and contract, and the agreement among the members – called an “Operating Agreement” – is what determines how the company is managed and the business run. The Operating Agreement is essential to the LLC and especially important with multiple owners.
Like a corporation, an LLC can exist in perpetuity; modern law provides that it need not specify an expiration date. Yet the LLC offers owners another attractive option – control over the future of the company. Since it is a creature of contract, the owners may specify how ownership interests in the company may be transferred or disposed of, and what rights the new owners will have vis á vis the current ones. Thus, on the one hand, you could provide for ownership options for high-performing employees – just like stock options – and yet, on the other, design a buy-sell agreement that would ensure that, in the event a member decides to leave, the remaining original members have a say in the future ownership and management of the company.
As you can see, there are a number of attractive reasons for choosing the LLC as the form of entity for your business. Of course, there are also competing considerations that must necessarily be taken into consideration. At McCormick Law & Consulting, we specialize in helping clients navigate their way through these complex decisions, with a view to helping you create the structure that helps your business thrive. Call us today or shoot us an email so that we can begin to help you put your company on the path to success!
If you are starting a new business and not sure where to start, check out our video and blog post entitled: 6 Key Steps to Starting a Business