We’ve arrived at part three of our series about choosing the right business structure for you. In parts one and two, we covered sole proprietorships and general partnerships. Now, this brings us to opting for a limited liability company or LLC. Today, we’ll cover different LLC benefits and drawbacks, tax considerations, and much more.
If you’d like to start at the beginning, you can find part one about sole proprietorships here and part two about general partnerships here.
What is an LLC (Limited Liability Company)?
An LLC combines the concepts of corporations and partnerships for tax and liability reasons. It offers the liability protection of a corporation and the tax advantages of a partnership.
To form an LLC, you need to file “Articles of Organization” with the Secretary of State.
It’s important to note, however, although LLCs share similarities with corporations, they are not the same. In an LLC, the members are the owners, and they have the freedom to choose who leads the company, similar to a corporation.
The management structure of an LLC can vary. The members can choose to handle the management themselves or appoint one or more managers to run the company. The guidelines for company management are typically outlined in the LLC’s operating agreement.
LLC Benefits
Here are some of the benefits of an LLC that can make this an appealing option.
1. Limited liability
True to its name, one of the critical benefits of an LLC is the assurance of limited liability for its members. This means their assets are typically safeguarded in case of a lawsuit or business collapse. As a result, it offers financial security and peace of mind.
Members are not personally responsible for the LLC’s business debts or court judgments, as the LLC is treated as a distinct legal entity. Additionally, there are no constraints on the number or type of members, which can include individuals or other businesses.
2. Benefits concerning taxes
Depending on the composition and number of members, LLCs have the flexibility to choose their tax classification as:
- Corporations
- Partnerships
- Sole proprietorships
Regardless of their ownership percentage, members can distribute profits and losses according to their preferences and easily access the company’s assets. This tax flexibility allows the LLC to optimize its tax structure, potentially resulting in favorable tax outcomes. Each member is individually responsible for filing taxes when there is pass-through tax liability.
3. Flexibility in management
LLCs provide flexibility in terms of management structure. Members have the freedom to select the individuals who will manage the company and determine how it will be run. This flexibility can be particularly beneficial when each member has a unique role or set of organizational tasks.
4. Ease of formation
LLCs are relatively easy to set up and operate compared to corporations. They have fewer formalities and compliance requirements, simplifying the process of establishing and running the business.
(Read about the difference between hiring contractors versus employees here)
5. Professional appearance
Choosing an LLC over a sole proprietorship or partnership can enhance the professional image of the business. An LLC tends to be more appealing to clients, suppliers, and investors due to its formal corporate structure.
In general, selecting an LLC can be a suitable option for those launching a small business who desire the liability protection of a corporation while benefiting from the tax advantages of a partnership. However, you’ll also want to consider the potential drawbacks of an LLC before finalizing this corporate structure.
Drawbacks of an LLC
1. Self-employment taxes
Since LLC members are often considered self-employed, they must pay self-employment taxes, including Social Security and Medicare taxes, on their share of the company’s earnings. This can be less advantageous compared to a corporation where the company pays corporate taxes, and members pay taxes only on their wages.
2. Potential for member disputes
In an LLC, where members have a say in management and decision-making, disagreements among participants can arise. Having a well-crafted operating agreement can help minimize conflicts and restrict the transfer of ownership interests to others.
3. Limited life expectancy
An LLC has a finite life expectancy as it terminates when a member passes away or chooses to leave the company. This can pose challenges in long-term planning for the future of the business.
4. Complexity
Operating an LLC may involve more complexity compared to a sole proprietorship or partnership. There are additional formalities and compliance requirements that need to be addressed.
5. Limited growth potential
LLCs may face limitations in terms of growth potential as the members are typically the sole source of capital for the business. This can make expanding the company or undertaking larger projects more challenging.
Conclusion: LLC Business Structure
In conclusion, choosing the right business structure is a crucial decision when starting a business, and opting for a limited liability company (LLC) can offer compelling benefits.
The combination of limited liability protection and tax advantages makes an LLC an attractive option for small business owners. The ability to distribute profits and losses according to the members’ preferences, along with the flexibility in management, adds to the appeal.
Additionally, the ease of formation and the professional image projected by an LLC can enhance the credibility and attractiveness of the business to clients, suppliers, and investors.
However, be aware of the potential drawbacks associated with an LLC listed above, including self-employment taxes, the potential for member disputes, limited life expectancy, complexity, and limited growth potential.
Contact Denver Business Lawyers
When considering the establishment and operation of an LLC, it’s highly advisable to seek guidance from experienced business lawyers in Denver. The team at Contiguglia Law Firm can provide valuable insights and assist in navigating the legal complexities involved in forming and managing an LLC and other business structures.
Working with professionals who specialize in business law helps ensure compliance, protect the rights and interests of the members, and set the foundation for a successful and legally sound business venture.
Remember, every business is unique, and seeking professional advice tailored to your specific needs is crucial in making informed decisions and maximizing the benefits of your chosen business structure. Contact Contiguglia Law Firm today for the support you need.
Did you learn a lot about creating a limited liability company in this article?
Here are three more articles to read next:
- What Are the 4 Types of Breach of Contract?
- 6 Business Risks & Mitigation Strategies Every Business Needs to Plan For
- Protect Against 3 Forms of Entrepreneur Liability
