Whenever I receive a call about forming a business entity, my first duty is to educate my potential client. Many have heard of the different forms, but most do not know the “ins and outs” and “pros and cons” of these entities and how it could affect their business or them personally. So, school is in session. Let us begin by learning about LLC’s.
The LLC Basics
An LLC is a business entity usually characterized as a partnership that wants protection like a corporation. Generally, they involve small, one, two or three-person operations. However, I have created LLC’s for franchisees that will have many business locations and employees. Many choose it because it helps to limit the liability of its members (the people involved in LLC), and it gives the tax flexibility of a sole-proprietorship or partnership. In most cases, profit and losses “pass through” the LLC to the members’ individual taxes.
Another important feature of an LLC is the limitation of liability. Each individual member’s liability is limited to his/her investment in the company. This protection is not available to a sole-proprietor or a partner who is liable for all the debts of the LLC. At the same time, an LLC will not always protect a member, or an LLC employee, from his or her negligent acts.
Pros of the LLC
Pros: 1. An LLC is easy to create – Most states require the filing of a Certificate of Organization. The fee for filing, in Idaho, is $100.00. You LLC may need to file a Certificate of Assumed Business Name, but check with your attorney first. 2. An LLC is easy to operate – you do not need to have formal meetings or keep minutes of any meeting to maintain your limited liability protection. 3. A Single-member LLC can put his/her share of income and losses on a 1040 – Schedule C, while a partnership can file a partnership tax form. 4. An LLC can opt to file as an S-Corp as long as members receive a reasonable wage for work they perform. 5. Members can distribute profits with fewer restrictions in an LLC. Often, each member in an LLC brings different skills and amounts of money into the company. Ergo, the division of profits/earnings will vary among members.
Cons: I’ll save this aspect of LLC’s for the next article as it will involve explaining the four characteristics of a corporation, and the limitation placed on LLC’s.