Should You Form an LLC for Your Business?

One of the most important choices an organization will make when forming a new business is which legal structure to choose: limited liability company, partnership, sole proprietorship, corporation, nonprofit, cooperative, etc. The type of business entity that will ultimately be the right fit will depend on a variety of factors such as liability, taxation, and record keeping. Many early stage small businesses often find that the flexibility and simplicity of a limited liability company (LLC) make it the best choice for them compared to other legal business structures. Here are some reasons why:

LLC advantages

• Limited liability. It’s actually part of the name, so limiting the business owners’ liability is obviously a major reason for choosing this business structure. With an LLC, business owners’ personal assets are protected from bankruptcy or litigation – provided there is no gross negligence or criminal activity.
• Less paperwork. Compared to corporations and the other types of structures, LLCs generally have less paperwork and less “red tape.” That being said, each LLC should have an operating agreement to create rules that govern their business.
• Pass-through taxation. With pass-through taxation, essentially the business income “passes through” the business to the owners, and each member reports their share of profits or losses on their own individual tax returns. This structure assures the members will avoid double taxation that can occur with corporations, where the corporation pays taxes on its income and the shareholders also pay taxes on their dividends. One thing to note, though, is that because there are no dividends with an LLC, members will get taxed on any profits regardless of whether those profits were distributed to the members or reinvested in the business.

LLC limitations
Of course, an LLC is not the perfect solution for every business. It has its limitations. For example, some jurisdictions don’t even allow certain professional groups (lawyers, doctors, accountants, etc.) to operate as an LLC. And since there are no official titles and reporting structures like there are in a corporation, there may be some confusion on roles and responsibilities within an LLC; and by default, an LLC dissolves when a member leaves the organization. However, many of these issues can be addressed and further defined in the operating agreement.

Please contact my office at virginia@virgielaw.com or 530-802-0640 if you would like us to help you organize your business as an LLC, corporation, nonprofit or other legal structure.

Virginia Ryan provides business law and estate planning services to clients in Northern California, including Auburn, Grass Valley, Nevada City and Truckee.