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Why Form a Limited Liability Company (LLC)?

For over 80% of small businesses the right choice is the simple one: the LLC.

Now that your small business is successful, it’s important to protect both your company and your own assets. Forming an LLC can help do that - but is it the best choice for you?

What Is an LLC?

The LLC (which stands for Limited Liability Company) has rapidly become one of the most popular entity types for new and small businesses, largely because it is considered to be simpler and more flexible than a corporation. The policies and cost vary from state to state.

When Is an LLC the Right Choice?

An LLC has many benefits that can work for different types of companies. Whether you are a sole proprietor, have a partner, or a multi-member corporation, the LLC is a great choice for small business owners, as it can provide the same limited liability protection as a corporation, without many of the complexities and formalities associated with them.Here are some of the most common advantages for forming an LLC:

  • Limited Liability Protection

    By forming an LLC, only the LLC is liable for the debts and liabilities incurred by the business - not the members. The members liability is limited to the personal interest they have invested in the company thus protecting the personal assets of the individual member that are separate from the LLC.
  • Pass Through Taxation

    The LLC typically does not pay taxes for itself. Instead, the net income/loss is "passed through" to the personal income of the owner(s)/member(s), and is simply taxed as personal income, and, federally it is handled very much the same as a partnership (or sole proprietorship, in the case of a single member LLC).
  • No Ownership Restrictions

    The LLC does not have any residency or citizenship restrictions, which allows foreign nationals to have ownership in an LLC, if desired. In addition, other corporate entities may be LLC members which means that other corporations or LLCs (or other entities) may be a member of the LLC, or may be the sole member (although an LLC with a sole member that is a corporation or LLC is treated for tax purposes as a partnership or multi-member LLC).
  • Versatile Tax Status

    One of the most advantageous aspects of the LLC is that it has the ability to choose how it is treated as a taxable entity. According to the IRS an LLC is, by default, federally taxed as a partnership (in the case of a multi-member LLC) or as a sole proprietor (in the case of a single member LLC). The LLC, however, may elect to be taxed as a C or S corporation at any time the members so choose.
  • Flexible Profit Distribution

    For an LLC, if the members choose, the net income/profits of the LLC may be allocated to the members in different proportions to their ownership percentage in the LLC. This is different from a corporation, as corporations are required to distribute profits exactly accordance with the proportion/percentage of ownership of each shareholder.
  • Minimal Compliance Requirements.

    LLCs are subject to limited state mandated annual filing requirements and ongoing formalities. While corporations are typically required to have at least an annual meeting of directors and shareholders (and initial meeting of the same), adopt bylaws, and keep minutes of all meetings and all formal corporate resolutions, an LLC is not required to do any of those things (see the explanation of an operating agreement, above). The LLC members may have whatever meetings they wish and may document any such things as they wish, however they are not required to do so.

How Does An LLC Protect You?

The LLC, much like a corporation, provides the LLC owners with limited liability protection. This means that the company assets are typically owned by the LLC and are separate from the personal assets from that of the LLC owner(s), Should there be a lawsuit aimed at the company, whether with or without merit, the LLC is the legal entity that would be sued. The assets of the LLC could be attacked, however that would be separate from the personal assets of the LLC owner(s), which would be protected.

The potential liability of an LLC owner is limited only to whatever that owner has invested in the LLC (such as an initial, investment or any retained earnings). This is very much the same as if you had purchased shares of stock in a corporation. In most cases, the most you can lose is what you paid for the stock, but you typically will not lose more than that, no matter how much the company might potentially lose or for however much the company might be sued.

What Are My Options For Structuring An LLC?

Unlike corporations, LLCs are much less formal in structure and how it is managed. The structure of the LLC is very much the same as that of a partnership (or a sole proprietorship in the case of a single member LLC), but with the limited liability protection, discussed above. The management of the LLC is typically invested in all of the LLC members, which is the generic term for the LLC owners.

The LLC members or owners are the ultimate authority, and are responsible for all aspects of the LLC. There are no separate positions like there are with a corporation (which requires shareholders, directors, and officers). An LLC member is like all three of those corporate roles in one (although LLC members may certainly have any titles they deem appropriate, and may agree to divide up various responsibilities in whatever way the members see fit); all members have complete authority over the LLC.

What Is Required Of An LLC?

LLCs (unlike corporations) are not required to hold annual meetings and keep minutes, nor are they subject to the more stringent record keeping required of corporations. The governing document of the LLC is the operating agreement and it is within this document that the members may lay out all important provisions, such as LLC governance, ownership, member changes (adding, removing, death, and incapacity of members) are stated. The operating agreement is an internal document, and is an agreement amongst the members or owners, which means that it is not recorded with the state.

How Can The Ownership Of An LLC Be Shared?

The LLC ownership is typically expressed in percentages (e.g. Sara and Jim each own 50% of S & J ENTERPRISES LLC) as opposed to the shares of stock that a corporation would have. Another business entity can even be a member of an LLC.

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