There are many factors to consider when starting a business and forming a legal entity. General partnerships and corporations both come with many unique drawbacks and advantages that must be considered when starting a business and forming an entity.
Luckily for business owners, there are Limited Liability Companies (“LLCs”). LLCs attempt to encapsulate the best attributes of partnerships and corporations.
Formation
Much like corporations and some formal partnerships, LLCs are distinct legal entities that are created by formally applying with the Secretary of State or a similar governing body, depending on the state in which you reside.
Generally, to form an LLC, one must file “Articles of Organization” or a “Certificate of Organization” and pay any accompanying fee. The Certificate of Organization is a document that lays out, among other things, the LLC’s name, street and mailing address, the contact information of the initial agent for service of process, and whether or not the LLC is organized to render a professional service.
Liability Protection
As the name suggests, one of the most attractive features of an LLC is the limited personal liability it affords its members. Like the shareholders of a corporation, the owners or “members” of LLCs enjoy protection from creditors of the business. Because LLCs exist as separate legal entities, personal assets of members are shielded from creditors as long as the members maintain a clear and distinct separation between the assets of the company and their personal assets.
Pass-through Taxation
Similar to a partnership, members of LLCs enjoy “pass-through” taxation treatment, meaning the entity is generally not liable for the payment of taxes on an entity level because the profits of the entity will “pass-through” to the members. Depending on the circumstances, LLCs are automatically classified as either sole proprietorships or partnerships for taxation purposes. In either classification, the profits and losses of the entity “pass-through” to the member or members. Pass-through taxation is generally advantageous because the member, or members, will be able to claim any income or loss from the business on their personal tax return, thus allowing for greater tax-planning flexibility and eliminating the double taxation incurred by corporations.
Management and Operation
In contrast to the formalities of a corporation, and similar to the flexibility of partnerships, members of LLCs enjoy a wide range of options when it comes to the LLC’s managerial and administrative structure. Members of an LLC have the ability and flexibility to dictate how the entity will be capitalized, managed, and governed in an “operating agreement,” an optional document that embodies the agreement between the members. In the operating agreement, the members can decide, among many other things, the purpose of the LLC, whether the members wish to be managed by a designated “manager” (a “manager-managed” LLC) or manage themselves as the members (a “member-managed” LLC), the frequency of which the members will meet, and the duration of the LLC.
When forming an LLC, it is crucial to be advised on every step of the process. Making a mistake when forming your entity can be costly, time-consuming, and could have potential legal ramifications. To learn more about forming and operating an LLC, contact Alex today by phone at 402-392-1250 or by email at [email protected].