Posts Tagged ‘LLC’

I previously wrote blogs on sole proprietorships and general partnerships.  I know this can be a little boring but hopefully it’s useful.  It’s important to know and understand all options.  Assuming capitalism doesn’t go by the wayside, one day you might start a company.  Heck, if high unemployment persists, you may have to start a company!

Before I go into the advantages and disadvantages of a limited liability company (LLC), I want to give you a question to ponder.  If you do decide to form a business, and you were a good boy or girl and sought the advice of a professional, one very important question should be, “What is your exit strategy?” The answer to this question could outweigh your opinions on other factors, even those on taxation.  This most important question is critical when considering choice of entity!

On to LLCs!  A Limited liability company provides the asset protection of a corporation and some of the tax liability of a partnership or (in case of a single owner) a sole proprietorship.  Lawyers love them and frequently suggest converting a sole proprietor to an LLC.  You still need to weigh the pros and cons.

Here are some (NOT ALL) advantages and disadvantages of a Limited Liability Company.

ADVANTAGES:

• Limited personal liability to members – members (owners) enjoy the limited liability that shareholders of corporations enjoy, meaning, members are NOT personally liable for the entity’s obligations beyond their investment in the entity.
• Flexible tax options – LLCs can elect to be taxed as a partnership, corporation or S-corporation.
• Bankruptcy – the entity is eligible to file for bankruptcy protection under Bankruptcy Statutes.
• Lower audit profile – the IRS does not audit LLCs as frequently as sole proprietorships.
• You can form a single member LLC which is taxed like a sole proprietor.
• Dissolution – when the LLC elects to be taxed as a partnership, it is possible to “unwind” an LLC without tax consequences to the entity or the owners; same as partnerships.

DISADVANTAGES:

• Expensive – forming an LLC is one of the most expensive and complex entities to form
• Self-employment tax – usually income is subject to self employment tax
• LLC fees – in the state of California, there is an LLC fee assessed on gross revenues, not profits.  This means your company could be bleeding from every corner, struggling to make money and still have the pay the fee. 
• Transferability is limited – in most states, there must be consent from all members to sell or transfer ownership interest.
• Limitations on types of businesses – many licensed businesses cannot use this form due to the limited liability such as contractors and accountants.
• Single member LLC – the IRS does not recognize a single member LLC and requires it to be taxed as a sole proprietor, therefore subject to self employment tax (yet still subject to the LLC fee in California).

A few additional facts about LLCs you might want to know:

• LLCs are formed by filing certain documents with the state.
• Unless the operating agreement states otherwise, all members have the right to participate in management of the LLC.
• Voting strength is not equal between members, voting strength is determined by each members’ proportionate ownership interest in the entity or by the operating agreement.
• Unless stated otherwise in the operating agreement, profits and losses are allocated on the basis of the members’ contributions.
• There are no rights to distributions.
• Unlike a corporation, entity life is limited.

See a professional when making these decisions. Every situation is unique and must be considered separately.