Entrepreneurship comes with an insane amount of decision-making. However, one of the most important decisions is choosing a legal structure for your business. A common choice for many entrepreneurs is a LLC, but why? LLCs are a “hybrid” business entity that combines the limited liability protection of a corporation, the pass-through taxation scheme of a partnership, with the added perk of management flexibility that neither a corporation or partnership can offer.

Do you think an LLC might be right for you? Keep reading and let's find out!

Flexible Management Structure!

The owners of a LLC are referred to as “members.” Members can be individuals, partnerships, trusts, or corporations, and there is no limit on the number of members an LLC can have. When it comes to determining a management structure, the members of a LLC can choose to manage the LLC themselves (e.g. “member-managed.”) Alternatively, the members can opt to bring in outside managers to run the LLC (e.g. “manager-managed”).

When an LLC is member-managed, owners oversee daily business operations. When an LLC is manager-managed, the LLC resembles a corporation, where business management is the responsibility of the directors and officers rather than the members (shareholders). The key to the management flexibility offered by a LLC lies in the operating agreement. An operating agreement is a legally enforceable contract that governs the internal operations of a LLC. Generally, an operating agreement fleshes out the relationship between the members, the process for adding new members, allocation of profits, capital structures, dissolution, voting rules, transfers of ownership etc. The appeal of forming a LLC is that this operating agreement can be drafted according to the members' desires as opposed to being governed by state law requirements!

However, it is important to note that if there is no operating agreement in place for your LLC, then state law will apply. Because of this, we recommend implementing an operating agreement to govern your LLC that incorporates your wants and needs. For assistance with drafting an operating agreement please contact our office at office@rosierlawgroup.com.

Limited Liability Protection!

A LLC is its own legal entity, separate and apart from its members. Meaning that a LLC can conduct business in its own name, own property in its own name, enter into a contractual agreement in its own name, file lawsuits in its own name, etc. Since a LLC is a separate legal entity, the members are generally not personally liable for the debts and obligations of the LLC and creditors cannot pursue the personal assets (house, savings accounts, etc.) of the owners to pay business debts! This is one of the most important advantages of operating as a LLC.

However, it is also important to note that this limited liability is not absolute. Under certain circumstances, a court could decide to “pierce the corporate veil” and hold members personally liable for the debts and obligations of their LLC. The most common instances of “piercing the corporate veil” occur when the members fail to maintain the legal separation between their business and personal finances (e.g. commingling funds) or where the LLC is used to perpetuate a fraud or injustice. Remember, the limited liability afforded by a LLC is a privilege, so don’t jeopardize it!

Taxation Structure Flexibility!

By default, the IRS treats single-member LLCs as disregarded-entities and multiple-member LLCs as general partnerships. Under both default tax structures, a LLC is still deemed a pass-through entity. This means that the profits and losses of a LLC pass-through to its members and are reported on their personal tax returns and the entity itself is not taxed. Under the IRS default rules, all of the profits of a LLC are only taxed once which is another advantage of operating as a LLC! This differs from C-corporations which are subject to double taxation, meaning that the corporation is taxed as separate entity and shareholders are also taxed at the personal level for distributions received from the corporation.

However, it is important to note that the IRS default rules aren’t the only tax structures available to LLCs. Members can choose to be taxed as a S-corporation, C-corporation, or even as a sole proprietorship. We recommend consulting with an accountant to determine which tax structure works best for your business.

Overall, operating as a LLC provides entrepreneurs with a lot of flexibility and benefits making it an attractive option. For more information on LLCs or for assistance with forming your LLC, please contact our office at office@rosierlawgroup.com.

Sources: Hutson, Heather, What is an LLC & How to form an LLC, Wolters Kluwer, 2021.