Each business has its own structure. It can take the form of a Limited Liability Company (LLC), Partnership, Limited Liability Partnership (LLP), Corporation, or Sole Proprietorship. The structure you chose for your business will be determined by what benefits and legal protections you are seeking for your business. Each structure is taxed differently and each member is subject to a different amount of liability. When starting your small business multiple considerations need to be made, among the most important is what form you want it to take.
Most often when you consult an attorney they ask: “What kind of business form do you want?” They are really asking: “How much liability do you want?” The bottom line to all of these different forms that business can take is liability. Liability is legal responsibility. It is the question of how responsible do you want to be for this business for taxes, management, and if your business gets sued who’s financially responsible (you, the business, or in some cases both).
The Pros and Cons listed below will be relative. By that I mean that a pro to one persons goals for their small business structure may be a con to another, depending on what type of legal protections you are seeking. Please note that this is not an exhaustive list.
Characteristics
LLC’s are created by filing articles of organization with your state office (the Secretary of State). An LLC is its own entity, distinct from its members. An LLC’s members are its owners. An LLC can have an unlimited amount of members, and those members can be individuals or another business(s). It has the power to sue and be sued in its name. An LLC has a duration that is perpetual so long as the business purpose is lawful.
Pros
- Limited Liability: The debts and obligations of the LLC belong only to the company, and members are not subject to personal liability.
- Single Taxation: As a pass-through entity, an LLC’s profits are only taxed once — on the members’ federal income tax returns — and not on a company level.
- Management Flexibility: LLCs can be managed by it’s members directly, or managed by a manager appointed by its members by a majority vote. A manager-managed LLC vests the exclusive right in the manager(s) to conduct the business of the company and make decisions on any matter relating to activities of the company.
Cons
- Veil Piercing: Commonly known as “Piercing the Corporate Veil,” this is a fancy term for saying that a judge could rule in court that your LLC structure no longer protects individual members from personal liability. In this case, members can be personally financially responsible. This can happen where the court finds there are fraudulent activities or commingling of personal and business assets.
- Record Keeping: To keep your LLC running smoothly, you must keep meticulous records — personal assets must not be commingled with the assets of the LLC, and minutes must be recorded for meetings. Although necessary, some may consider this a hassle. Even though some come to this conclusion, I would caution that impeccable record keeping is essential to keep your business running smoothly and out of trouble. Essentially, record keeping is good business.
- Filing Fees: There is no national uniformity in the cost to file your articles of organization to form your LLC. It varies from state to state. In New York, for example, it cost $200 to file, whereas in Montana it is $70. Moreover, some states might have ancillary fees additional to the filing fee like state fees or registered agent fees.
As you can see there are multiple considerations that must be made when starting your business. Deciding what form your business operates as is just the tip of the iceberg, but a very necessary step to weigh.
Are you starting a small business? Have you thought about what structure you’d like it to be?
*Note: This post does not constitute legal advice. This post is for educational reference purposes only.
References:
- Revised Uniform LLC Act 2006
- Andrew L. Wang, LLC: Pros and Cons of a Limited Liability Company, NerdWallet (July 28, 2017), https://www.nerdwallet.com/blog/small-business/starting-successful-llc/.
- Disadvantages of An LLC, LegalZoom https://www.legalzoom.com/knowledge/llc/topic/disadvantages-of-an-llc (last visited, March 24, 2020).