Starting a Business 101: What Is an LLC?
The limited liability company (LLC) was first adopted by Wyoming in 1977. It is a business structure has only become commonplace across the country in the last twenty years. But today, it is the most popular business entity in most states. It provides its owners the same liability protection that corporations receive while allowing its owners to maintain a partnership-like business flexibility.
It’s easy to set up, easy to maintain, and provides many of the same benefits as the most complicated business entities.
As with a corporation, the liability afforded permits owners to keep the losses and gains of the business separated from personal assets. If someone sues you, the losses associated with that lawsuit are limited to the ownership interest maintained in the business. Assuming the owners keep proper governance and do not make personal guarantees, the plaintiff in the lawsuit cannot touch the owner’s personal assets in any lawsuit.
- Flexibility. You can distribute losses and gains however you want. You can set up ownership interests however you want.
- Limited Liability.
- Easy. If it’s just you, it’s possible to set up in less than an hour. If you have a partner or multiple partners, it is recommended and advisable to draw up an operating agreement that governs the owners’ relationships with each other and the business. This forces you to consider all the tough issues when you’re getting started, rather than when you face the problem under stress.
- Pass-Through or Double Taxation. It’s one of two business structures that allow you to pick whether you’d like pass-through or double taxation.
- Bigger LLCs face greater complexity. While many owners choose the form because it’s easy, when you get more parties involved, running it can become more complicated than running a corporation. Partnership tax issues are very complex, and should not be handled without the advice of a competent account.
- Ill-Suited to Raising Capital – Most venture capitalists won’t touch them. If you’re looking to raise large amounts of capital in the first few years, it’s almost always best to start as an S or a C Corporation.
- Standard Corporate Practices Often Difficult to Achieve – Option grants, preferred stock, and inactive minority ownership interests are all much more difficult to effectuate under an LLC than with a corporation. If you’re thinking of starting a business that will need these tools, have a chat with an attorney before you do.
Who should start an LLC? This entity well-suited to any potential business that wants limited liability with pass-through taxation, lower maintenance, and flexible management options. This is common choice for law firms, real estate companies, dry cleaners, and a host of other small businesses.