Choosing a Business Entity: Limited Liability Companies
Protecting your personal assets from creditors of your business is an important matter. That’s why many business owners form one of several types of business entities. Of course picking the right one can be confusing at times.
That’s why we are covering various entity options on the Krigel & Krigel Blog. For more coverage, be sure to read our other posts on this topic:
In today’s post we want to dive deeper into LLCs. We should also point out that LLCs are becoming the most favored business entity structure for most new companies today. This is largely due to their flexibility. We wrote about that flexibility in this post, here we want to explain more of the legal components of LLCs.
Unlike general partnerships, the only way to create a LLC is to file formation documents with the Secretary of State in the state in which you wish to create your LLC. Most often your LLC will be “organized” in the state in which you do business. However some companies choose to organize in Delaware even if they don’t operate there to take advantage of business friendly laws, courts, and government offices.
In most states your organizing documents will state your business name, your date of formation, whether you or member-managed or manager-managed (see below), as well as some other key pieces of information. You will also be required to designate a registered agent, a person or company who can accept service papers in case you are sued.
Provided you operate like a business (adequately capitalize your business, maintain business bank accounts, hold meetings of members, sign documents for the company rather than individually, etc.) you can avoid personal liability for the debts, obligations, and other liabilities of the LLC. If you fail to operate as a business, then potential creditors can seek to pierce the corporate veil and sue you as an individual.
When creating your LLC, it is important to speak with a business law attorney to make sure you are both established properly and that you operate properly moving forward.
One of the biggest advantages of LLCs are the taxation options. Owners of a LLC can choose to be taxed in multiple ways: as a sole-proprietor, as a partnership, as a s-corporation, or as a c-corporation.
Only single-member LLCs can elect to be taxed as a sole proprietor, under which all profits and losses are passed through to the sole member’s tax return. Single-member LLCs can also opt to be taxed as a s-corp or as a c-corp, but cannot elect to be taxed as a partnership.
Multi-member LLCs may elect any of the tax classifications except sole-proprietorship taxation.
When an LLC is taxed as a partnership, all income, losses, deductions, and the like are passed through to the owners’ individual tax returns via a K-1. The same is true for s-corp taxation, but you should read our post on s-corps here. Lastly, c-corp taxation means that the company pays tax on its income, then the owners pay a tax on distributions made to them.
The most important document for an LLC is its Operating Agreement. This agreement will outline the rights and responsibilities of the owners and the company itself. It explains how voting is handled, how to add and/or remove members, the taxation election of the company, and more. These agreements can be short, but they are more often 10-20 pages and sometimes well over 50.
One item that should be covered in an LLC Operating Agreement will be management of the LLC. In member-managed LLCs, all members have the right to bind the company to contracts with third parties. In manager-managed LLCs, only the manager(s) hold that power. Of course, in a manager-managed LLC, the members can restrict the manager’s powers in the Operating Agreement itself.
Consult with a Business Entity Attorney Today
Before you make the decision to operate your business as a LLC, it is in your best interest to consult with a legal professional who knows the intricate details of business entity law. Together, you and your attorney can explore which business entity model is the right choice for you.
At Krigel & Krigel, we have many business attorneys that can help you. You can learn more about our Kansas City business practice group and its attorneys on the business law page at krigelandkrigel.com.
Image: Thinkstock/Rawpixel Ltd
*This article is very general in nature and does not constitute legal advice. Readers with legal questions should consult with an attorney prior to making any legal decisions.