05 Jan Why a Limited Liability Company?
More and more, entrepreneurs are choosing to start their businesses as limited liability companies (known as “LLC’s”). This is not surprising because the LLC does not typically have the same level of formalities that a corporation requires, while offering other tangible benefits to the owners (referred to as “members”).
LLC’s are a hybrid legal entity, offering some of the best characteristics of partnerships and corporations. The LLC allows for an unlimited number of members. A corporation can even be a member of the LLC.
Importantly, the LLC offers protection to the members from business debts and claims. It creates a legal separation between the individual members and the entity so long as the members respect the separate corporate identity of the legal entity (keep money separate, open business bank accounts, use the entity for all business purposes).
LLC’s also provide for the flow-through tax advantages of a partnership, with liability protection to the members. Typically, the earnings and losses pass through to the members and are included on their personal tax returns.
Without question, the members of an LLC have more flexibility in management and operations. Members of the LLC can decide how management decisions will be made and by whom. Members are not required to appoint a board of directors to manage the company. Members are not required to hold regular meetings or keep meeting minutes. Members can and should agree on how best to manage the company at the outset including how profits will be distributed and when, whether new members may be added, whether members may withdraw. These types of issues are generally addressed in an operating agreement, which governs the relationship between members.
Talking to an accountant or an attorney about your long-term goals for the company including your anticipated revenue, plans to take on investors or scaling is important in determining whether the LLC is the right choice for you.