Limited Liability Companies (LLCs)
The decision to start your own business is a great step in life, and we are here to help. To be successful entrepreneurs need:
- A great service or product to provide to the public
- Guidance to find the intelligent way to structure the business
Poorly thought out business structures, often a Sole Proprietorship sometimes called a "Schedule C", can have taxes drain the life out of the core business, and expose the investors other assets to dangerous external liabilities. Fortunately, we have a tool that gives us great flexibility — the Limited Liability Company.
The Limited Liability Company
Forming a Limited Liability Company (LLC) should be considered when you are deciding to start a business, as for many startups it is the best choice. Instead of just following the herd, take the time to discuss the matter with us—your business success is our fundamental objective.
LLCs are puzzling and intimidating for many. Most do not use this legal entity to the fullest, and some dangerously abuse it. The LLC offers the limited liability of a corporation, while allowing tax flexibility, as well as simpler requirements than traditional corporations regarding managing the business and organization.
Like the shareholders of a corporation, LLC owners are protected from personal liability for business debts and claims. This means that if the business itself cannot pay a creditor—such as a supplier, a lender, or even a landlord—the creditor cannot legally come after any LLC member's house, car, or other personal possessions. Since only LLC assets are used to pay off business debts, LLC owners losses are limited to the assets that they have invested in the LLC. This feature is often called "limited liability."
However, like all corporate structures, abuse of the entity's provisions can "pierce the corporate veil" and can expose careless LLC owners personally. One of the most common mistakes made, is the intermingling of personal and corporate funds, and in effect turn the LLC into your alter-ego instead of its own discrete entity. To help ensure that this does not happen you should open a new bank account and credit cards in the name of the LLC only, and continue to keep your personal accounts completely separate. Keep in mind that by allowing a member,as an individual, to co-sign on a loan or another account, you could be exposing the member's assets. Of course as your company produces profit, funds will be transferred to the members personally, but it needs to be done in the correct manner as dictated by the LLC's tax structure.
Treatment of LLCs from a Tax Perspective
LLCs have been called “pass-through entities”, this means that as business income passes through to the LLC members who then report their share of profits or losses on their individual income tax returns. However, this statement is only partially correct. An LLC can be taxed four different ways: like a C Corporation, S Corporation, Partnership, or Sole Proprietorship. You need only to understand and consult with your tax accountant to decide the best taxation for your business venture.
The LLC management can be handled in two ways, member-managed or manager-managed. Member-managed is the most widely used LLC management structure. Member-managed simply means that the LLC is managed equally by all of the owners. Manager-managed means that you designate one or more owners or even an outside person to take responsibility of the managing of the LLC. The non-managing members simply share in the LLC profits or losses. The Manager-managed structure only allows the named managers to vote on management decisions of the LLC.
While some have decided to file the necessary forms with a state themselves, it is critical to ensure that a proper and appropriate operating agreement is in effect. Thus we recommend that you use a qualified legal service or attorney with our assistance.
The LLC offers business owners flexibility and financial protection, while being cost effective and uncomplicated to start. It is the best choice for many kinds of businesses, including some of the largest in the United States. We hope that this has shed some light on the LLC structure and that you do what is right for you and your business.
To protect yourself make sure that:
- Your LLC is correctly setup
- You do not commingle funds
- You do not abuse the entity's provisions
- You understand and follow your operating agreement
Additional Questions to Discuss:
- Do I need to setup the LLC in the state that I am doing business in?
- How does state that I choose affect my financial privacy?
- Would it ever be beneficial to use multiple LLCs for my business?
- What other types of entities, or trusts naturally complement LLCs?
- What else can I do to harden my LLC so that a member is best protected?