The Newest Form of Business: What You Need to Know About the Limited Liability Company
The final form of business is the Limited Liability Company or LLC. An LLC is a relatively new business form available in the United States, though not in other countries.
It wasn't until 1997 that all 50 states as well as the District of Columbia recognized an LLC as a legal entity. However, once they were accepted, they gained fast acceptance.
Just What Is a Limited Liability Company?
A limited liability company, in many ways, is similar to a partnership. However, it also has the legal asset protection of a corporation.
A limited liability company (LLC):
- Owners are called members not partners or shareholders
- Number of members are unlimited
Two Main Points To Remember
Although setting up an LLC is not as easy as setting up a sole proprietorship, it is much easier than setting up a corporation.
There are two main actions when forming an LLC – creating articles of organization and creating an operating agreement.
Articles of Organization: The articles of organization is a document that outlines the rules that will govern your LLC.
You will have to file your articles of organization with the Secretary of State and then pay the associated fees.
Although it is possible to write your own articles of organization, it may be best to have an attorney help you with this.
Operating Agreement: An operating agreement lays out each member's financial and managerial rights and duties.
It will help you determine how the profit sharing will work, as well as what each person can and will do, and how the LLC will operate as members change.
Why You Would Want To Be an LLC
The main advantages of an LLC have to do with taxes and liability. You and your LLC are treated as one.
As such, you avoid paying both business income taxes and personal income taxes.
When it comes to liability, you and your LLC are treated as separate entities and you will not be help personally liable for debts or other actions.
Other advantages include:
- Profits do not have to be 50/50 as in the case of a partnership
- You will not have to form a board
- You will not have to have board meetings
Now let's look at the disadvantages of an LLC.
Three Disadvantages to Consider
One of the biggest disadvantages is the added complexity over a sole proprietorship or partnership.
You will have to determine how to classify your LLC for tax purposes.
You will have to file paperwork with the state. And you will have to pay fees associated with these filings.
Other disadvantages include:
- An LLC ends when a member dies or a member goes bankrupt
- You cannot take a company public as an LLC
Determining the right form for your business venture is crucial. Looking at the advantages and disadvantages for each will help you determine what will work best for your situation.
Using a professional such as an attorney or CPA is always a good idea when making these decisions since the form your business takes will affect you both legally and financially.
Next Chapter:
Chapter 4 - Failing to Plan Is Planning To Fail
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