This is the second stop in The Wagoner Firm in-depth look into different business entity options. Limited Liability Companies (“LLC”) are the most contemporary of the common entities in the business world, and are often referred to as the entity of choice. From a general point of view, LLCs have many similar characteristics to corporations, but offer more flexibility and less paperwork. Unlike corporations, An LLC is not considered a separate entity, and it is treated as property of its members. This has many important consequences for members. Some great advantages to this entity choice include a full liability shield, tax choices, and flexibility in management.
As mentioned in our previous blog about corporations, a very important aspect to consider when forming an entity is the liability that its members could potentially be faced with down the round. Like corporations, LLCs offer their members a full liability shield, protecting their personal assets from lawsuits brought against the LLC (and event the members under some circumstances). Other entities, which are not incorporated, do not provide this level of protection, and the personal assets of the owners of those entities – like partnerships and sole proprietorships are at risk. Another benefit of the LLC, when compared to the corporation, is there are not nearly as many formalities for the company to follow in order to maintain its liability shield, which makes management and operation less burdensome.
LLCs are able to qualify for what is known as “pass-through” taxation. This tax structure allows for the profits and losses to be provided on the personal income tax forms of the individual members who earn money from the company. This is different than the tax structure that most large corporations, known as C-corporation. With C-corporation, the entity is taxed and then any income given to the shareholders is again taxed on as personal income, creating what is known as “double-taxation.” We will discuss another type of corporation that is eligible for pass through taxation, known as S-corporation, in the next blog. Notably, an LLC can choose to be taxed as an S-corporation based upon certain factors that make doing so more advantageous – but that is a conversation to have with a CPA.
LLCs draft their own operating agreements, which are analogous to the By-laws of a corporation. This document creates the rules that will govern the LLC. Unlike most corporate structures, operating agreements allow customization of the LLC’s business scheme and members’ managerial and financial duties to the LLC. Specific to members, the operating agreement lays out each member’s unique duties, rights and ownership in the company. This includes succession and dissolution of the LLC, how members will be added or removed, and how capital contributions will be treated by the entity, among other important factors. In addition, the agreement lays out whether or not the company chooses to be member-managed (managed by the members), or manager-managed (managed by a chosen manager). This flexibility in customization will allow the company to be run in a way that works for your business
For any questions about LLCs or for more information about the best entity for your business please feel free to contact The Wagoner Firm for a free consultation.