A limited liability company (LLC) is a hybrid, of sorts, which takes on some of the best aspects of both the corporate and partnership business structures. As a result, the LLC has quickly gained in popularity and is often the first type of business structure that new business owners consider.
What are the Main Advantages of an LLC?
As indicated by its name, a limited liability company offers limited liability protection to its owners and members, which is often why the LLC structure initially appeals to individuals starting a business. With regards to taxation issues, an LLC can choose to be taxed as a partnership or a corporation and, just as in a partnership, the LLC offers its owners the benefit of pass-through taxation, wherein the LLC’s profits and/or losses are reported on the individual tax return(s) of its owner(s). Additionally, unless the LLC has more than one member and opts to be taxed as a partnership, there may not be any need to file a separate business tax return. Finally, the flexibility that an LLC offers can be incredibly attractive – there is no limit to the number of LLC members, members can be individuals, partnerships, or corporations, each member and/or owner can fully participate in the operation of the LLC, each members receives a percentage of ownership in the LLC, the profits and/or losses of the LLC are not required to be distributed in proportion to those ownership interests, and the formalities required to maintain an LLC are vastly fewer than those required to maintain a corporation.
What are the Main Disadvantages of an LLC?
Unlike a corporation, a limited liability company cannot issue and sell stock certificates/shares in order to raise funds. Rather, if you plan to seek out investors, or otherwise raise money for the LLC, you will be required to provide those investors with an ownership percentage of the LLC and, further, must decide whether they will be managing members of the LLC. Additionally, if you provide yourself and/or your employees with fringe benefits, you cannot deduct those costs as you can with a corporation. Finally, although an LLC does not have nearly as many formality requirements as a corporation, the LLC ought to draft and execute an operating agreement. And, while one can find operating agreement templates on the internet, it is strongly encouraged that you meet with an attorney to ensure that the operating agreement provides thorough and clear structure to the LLC, spells out its terms and conditions, complies with the applicable laws in your state, and, ultimately, works to protect the LLC members from personal liability.
LLC versus S Corporation
If you have considered the corporate structure, and in particular an S Corporation, you may have noticed that the limited liability company and S Corp. share various characteristics. Namely, each structure is a separate legal entity which offers both pass-through taxation and limited liability protection to its owners. Despite these similarities, though, there are distinct differences between the two, which are important to understand. As mentioned above, there is no limit to the number of LLC members, and those members can be individuals, partnerships, or corporations. An S Corp., however, does have a maximum allowable number of owners/shareholders, and cannot be owned by corporations, LLCs, or partnerships. Additionally, as it is a corporation, the S Corp. must adhere to a greater number of formality requirements than an LLC, including, among other things, the prohibition of directors’ involvement in day-to-day business operations and decisions.
If you are thinking about creating a new business and believe that a limited liability company is the best structure for that business, or if you need guidance in determining whether an LLC or corporation is the right fit, please do not hesitate to give us a call! Our experienced attorneys will be more than happy to provide an in-depth comparison of these business structures, so that you can make a well-informed and sound decision, getting your new business off to the best start possible!