Are you starting a limited liability company (LLC)? Do you need an operating agreement or articles of organization? Do you understand the benefits, liabilities, and responsibilities of starting and operating an LLC? Alternatively, is your company already formed as an LLC, but do you need help with things like acquisition of assets, service agreements, bank financing, real estate, or commercial leases?
LLCs offer real benefits, but many other factors exist that must be considered and addressed in an appropriate and strategic manner. At the Law Office of Jennifer M. Settles, we will work with you on establishing a successful limited liability company. Contact Prime Legal today at 602-617-3938 to schedule a FREE initial consultation and to learn more about the benefits of hiring a business attorney.
What is a Limited Liability Company (LLC)?
The specific laws relating to the formation and operation of an LLC vary by state. A limited liability company is a business structure that combines features of a partnership and a corporation. Like a corporation, the owner's personal liability in an LLC is limited (i.e., limited to such owner's investment in the entity). However, an LLC's tax treatment is typically the same as that of a partnership, unless corporate tax treatment is specifically selected.
LLCs equity owners are called members. Each member owns a percentage of the business that is typically proportionate to its investment in the LLC. Management of an LLC is typically vested in a Board of Managers (though sometimes called a Board of Directors). Alternately, in many states, day-to-day management can be vested in the members directly.
Like partnerships, the attributes of an LLC are governed by the terms of the LLC's operating agreement. As a result of this feature, the members can negotiate and execute a written agreement governing such topics as distributions, capital contribution requirements, tax allocations, day-to-day management and approval requirements for significant decisions, sales of membership interests, admissions of new members, and other features.
What's the Difference Between an LLC and a Corporation?
While both limit the personal liability of their equity owners, there are several key differences between corporations and LLCs.
C-corporations are separate tax entities, filing and paying taxes at a corporate level. In comparison, LLCs are pass-through entities from a tax perspective. Unless they specifically select to be taxed as a corporation (whether a C-corporation or S-corporation), LLCs are not taxed as a separate legal entity but rather their profits and losses are passed to their owners, who then pay tax on the profits at their personal tax rate.
LLCs use an operating agreement to set out how they will be governed, including management and decision-making structure, restrictions on buying or selling shares, profit sharing, and dissolution. Operating agreements are flexible and can be negotiated and drafted according to the members' wishes. Corporations, on the other hand, are required to formally adopt bylaws according to the relevant state law and generally have less flexibility in terms of entity governance.
Both LLCs and corporations must comply with state law relating to periodic filings with the applicable Secretary of State (or similar) office and payment of filing fees. The requirements vary, depending on the state of formation and conduct of business.
Advantages of an LLC
There are many advantages that flow from forming a business as an LLC. Below are descriptions of a few of them.
- Limited liability. One of the biggest advantages of an LLC is that it limits the liability of owners to their investment in the business. So long as the correct operational protocols are followed, LLC owners can not be held personally liable for a company's debts, and their personal assets are protected in the event the LLC can't pay its creditors, files for bankruptcy protection, or is subject to a claim or lawsuit.
- Taxation. By default, an LLC is a pass-through entity for tax purposes. This means that taxation is passed to the LLC owners, who pay taxes on the profits (or losses) via their personal tax return, thus avoiding the "double taxation" structure which is inherent in C-corporations. In some circumstances, an LLC can elect to be taxed as a C-corporation or S-corporation, which can be beneficial in some cases. This flexibility allows the LLC members to choose the taxation structure best suited to their situation.
- Flexible management structure. When it comes to management, the members of an LLC can choose to either share management responsibilities or act like passive investors by nominating one or more managers to run the business (who can be either members or non-members). The details of such governance are reflected in the LLC's operating agreement.
- Flexible financial structure. Capital contributions, tax allocations, distribution rights, dissolution rights, and other features, can be negotiated and set forth in the LLC's operating agreement. This feature allows for maximum financial flexibility.
Whether one of the above or other advantages benefit your business depends on the business itself and what your goals are. That's why speaking to a business attorney can be critical to the success of your company. Prime Legal Freelance can help you align your goals with a suitable business structures so that you can be confident you form and operate your business under the most advantageous structure available to you.
Disadvantages of an LLC
Some disadvantages exist with any given business structure. Here are a few that you should be aware of if you intend to form an LLC.
- Set-up costs. Forming an LLC often involves filing fees and, in some states, publication in a local newspaper. It can be more expensive to set up an LLC than other business entities, like a sole proprietorship or partnership. Many states also require annual of biennial filings and accompanying fees. That said, filing fees are usually relatively nominal (i.e., a few hundred dollars).
- Forced dissolution. In some states, an LLC must be dissolved when a member leaves, dies, or files for bankruptcy protection. In comparison, a corporation exists in perpetuity, until affirmatively dissolved.
- Transfer of equity ownership. Depending on different factors, including the terms of an LLC's operating agreement, it can be more difficult to transfer the ownership interest in an LLC, as compared to a corporation. Of course, this trait can be viewed as an advantage as well, depending on the circumstances.
- Potential investment limits. External investors and lenders sometimes prefer investing in a corporation rather than an LLC. This preference is because an LLC can be viewed as a more "complicated" structure in terms of taxation and governance, and because the judiciaries of certain states may be deemed by investors as unsavvy in the interpretation or enforcement of LLC operating agreements and relevant LLC statutory schemes. This disadvantage has declined in recent years, however, as LLCs are increasingly common.
Do You Need a Business Lawyer for an LLC?
While there's no legal requirement to hire an attorney when forming an LLC, it's a good idea to speak to a business lawyer to confirm whether it's the right business structure for your circumstances.
A business lawyer can also assist you with selection of the jurisdiction of domicile, forming an LLC, including registering your business and drafting documents such as the operating agreement. They can also often continue to act as your registered agent, receiving any legal documents on behalf of the LLC.
If your business is complex or involves especially risky transactions, a business lawyer can work proactively to avoid legal mistakes on your behalf. If a legal issue arises, a business lawyer will walk you through the process, representing your interests throughout it.
Contact a Business Lawyer Today
Make sure your company gets started on the right legal foot by making sure the business formation you choose, whether it's an LLC or another entity, is right for your business goals and objectives. Get clarity and strong representation for a business already established as an LLC. Contact the Law Office of Jennifer M. Settles today, either by using the online form on our website, www.jsettleslaw.com, or calling 602-617-3938. You can schedule a FREE initial consultation to get the answers you need to some of your most pressing legal questions related to your business.
Jennifer M. Settles, Esq. is a corporate lawyer at the Law Office of Jennifer M. Settles. She advises clients on M&A transactions, commercial contracts, real estate matters, financing transactions and corporate law. To schedule a free consultation with Jennifer, please call 602-617-3938, or connect through our website.
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