Should You Form an "LLC"?

Thursday, 04 September 2014 Posted in Attorney Articles

Should You Form an

One of the questions that folks will ask us on a consistent basis is whether or not forming a Limited Liability Company ("LLC") is a good call for their business and investments. In most cases, the answer is "Yes".

Wyoming was the first state in 1977 to offer the LLC as an entity for doing business. Since that time, all other states have adopted statutes allowing some form of LLC, and millions now exist. Why is it so popular? Simple - because in contrast to a traditional corporation, the LLC is, well, simple. If you currently operate a business as a sole proprietorship - even if you just own rental property - changing to an LLC is probably a good bet. While not without some drawbacks, the advantages are many. The primary attraction is that the owner's individual assets and other business holdings are usually protected from the debts of the LLC. Of course, this is true with the more traditional corporate forms as well. The LLC, however, often offers considerable tax and operating benefits over other forms of entities. If you are the only owner, the LLC can still be taxed as a sole proprietorship. Your accountant will probably explain to you that this is advantageous when it comes to compensating yourself through distribution of profits and avoiding double taxation. Limited Liability Companies with multiple owners (called "members" and not "shareholders") may be treated as a partnership or can elect to be taxed as a corporate entity. There are several choices to make in this respect, so speak to an accountant if this is of interest to you.

As shocking as it must sound, most lawyers don't like extra paperwork either. The LLC simplifies the paperwork by allowing businesses to be conducted in a more practical and informal way. Corporations must carefully keep paper records of "meetings" being conducted by the board or other owners, and all major decisions and actions are recorded through minutes or resolutions. As we all know, in a small business, the "meetings" are often conducted over the dinner table or on the hood of a pickup truck. Accordingly, the LLC requirements for paperwork and meetings are far less demanding. Don't confuse less demanding with nonexistent. If you are forming a multiple-member LLC, it is extremely important to have an attorney prepare an Operating Agreement. The LLC's Operating Agreement is an agreement among the members - similar to a corporation's bylaws - that describes operations and governs the relationships among members. As with any other business "marriage", it is important that these agreements be reached at the beginning, while everyone is getting along and thinking clearly, instead of after a problem develops.

Like anything else, there are drawbacks to go along with the advantages. One drawback that I have seen is that it is more difficult for an LLC to seek outside investment from individual investors or venture capitalists. Also, because there is no stock, the company cannot offer stock options to employees. These issues, however, are not a factor for probably 90% of the business owners that we consult with. If the LLC permanently holds real estate, another consideration is the cost of insurance and financing limitations.

As with any business decision there is rarely a one-size-fits-all solution. If you operate a business as a sole proprietor and would like to consider if a Limited Liability Company or other business entity would be a beneficial move, please do not hesitate to contact the Finklea Law Firm to discuss your specific needs. We work hard to provide our clients with the best service in the industry and look forward to working for you.