There are many benefits and advantages to creating a limited liability company (“LLC”), whether for your new business, or as a reorganization of an existing business. The benefits of creating an LLC usually outweigh any disadvantages, and are generally unavailable to sole proprietorships and partnerships.
LLCs can provide limited liability protection to the owners of an LLC. Therefore, typically, the owners would not be personally responsible for the business debts and liabilities of the company. A major benefit and advantage of an LLC is that creditors cannot pursue the personal assets of the owners to pay debts held by the business. On the other hand, in a sole proprietorship or general partnership, the owners and the business are legally considered the same, which could leave personal assets of the owners vulnerable.
Another advantage of an LLC is “pass-through taxation.” LLCs will typically not pay taxes at the business level. Any business income or loss is “passed through” to owners and reported on their personal income tax returns. Any tax due on the company is paid at the individual level.
LLCs also face fewer state-imposed annual requirements and ongoing formalities than corporations. Corporations are required to prepare and file additional administrative paperwork each year, such as by-laws, board of directors meeting minutes, shareholders meeting minutes, etc., which would be additional time and expenses on a yearly basis. An LLC provides much easier management regarding taxes and normal operations.
LLCs have the flexibility to establish any type of management structure. LLCs can be managed by the owners (members) or by managers, unlike corporations which have a board of directors and officers.
Even though the advantages of creating an LLC typically outweigh the bad, LLCs do have some potential disadvantages as well.
To form an LLC, Articles of Organization must be filed with the state and the applicable state filing fees must be paid. While these fees often are not very expensive for small businesses, LLC formation can be more expensive than that of a sole proprietorship or general partnership, both of which are not required to file formation documents with the state or pay any filing fees.
Additionally, transferring ownership interests in an LLC is often harder than with a corporation. With corporations, existing shares of stock are generally freely transferable and new stock can be issued to increase ownership. With LLCs, generally all owners must approve the addition of new owners, the sale of any ownership interest, or the altering of the ownership percentages of existing owners.
If you have any questions about forming a new business or reorganizing your existing business, please contact the business law group of Tremba, Kinney, Greiner & Kerr, LLC to determine how best to protect your personal assets and advance your business interests.
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