One of the most important decisions you can make for your business is the type of entity you form. This determines how numerous aspects of your company will work — such as taxes, personal and company liability, and profit sharing. Whether you work alone or the business is a group effort, you have choices when it comes to your entity form.
The limited liability company is one of the most popular entities formed by small businesses here in California and elsewhere. Perhaps you even know other entrepreneurs who formed this type of entity and recommend it. However, before you make your final choice, you may want more information. Below you may find the answers to at least some of your questions regarding this type of entity.
Some facts about LLCs
It may help you to understand some basic facts about this type of entity structure, such as the following:
- An LLC is neither a partnership nor a corporation.
- An LLC does combine certain elements from a partnership and a corporation.
- An LLC does not have partners or shareholders. Instead, it has members.
- An LLC can have one member or 100 members that may include other LLCs, individuals or corporations.
This entity attempts to combine the best aspects of a corporation with the best aspects of a partnership. As such, it provides you with certain advantages. When it comes to the disadvantages, it may depend on whether your viewpoint comes from the partnership or corporate perspective.
Some pros and cons of LLCs
Several things make LLCs attractive to small business owners, but they also think some of them come with a price. Below are the most common pros and cons of this type of entity:
- As an owner and member of an LLC, you enjoy the limited liability that corporations provide. You do not take on the debts and liabilities of the company unless you explicitly do so in writing.
- Unlike a corporation, an LLC does not last beyond your death or bankruptcy.
- Unlike a partnership, the profits from an LLC do not have to be divided equally. You and the other members make that determination in your operating agreement.
- LLCs don’t pay taxes as a corporation does. All of the company’s expenses, profits and losses pass through it to you. The IRS doesn’t collect taxes twice — once from the company and once from you.
- You may not have to have annual meetings, keep minutes and attend to other paperwork requirements like a corporation does, but more paperwork is required than in a partnership or sole proprietorship.
Even if paperwork isn’t your thing, the limited liability and other benefits may be worth spending a little more time behind a desk.
Setting up an LLC
Fortunately, the paperwork requirements to set up an LLC are few. You need to create and file Articles of Organization with the state of California and develop an operating agreement, which outlines who the members are, how members share profits and how you run the business.
Even though an LLC doesn’t require a ton of paperwork, the documents you do need are important. If not done correctly, you could encounter issues in the future. You may benefit from enlisting some experienced help in setting up your new company in order to ensure that it complies with all state and federal laws. Otherwise, the protections and other advantages you gain from this structure may not be there when you need them.