WHAT IS AN LLC?
- An LLC is a hybrid between a partnership and a corporation.
- It provides liability protection without as many corporate formalities as a corporation, and is thus a favorite choice for busy people.
- One of its best features, that differentiates it from a “C” corporation, is its lack of double taxation: owners of LLCs do not have to file a separate tax return; they simply add a schedule C for their LLC profit and loss to their personal income tax return, and pay at the individual tax rate.
- The owners of the LLC are called members; the owners of a corporation are called shareholders or stockholders.
- An LLC can be managed by a non-member manager, or by one or more members.
PROS OF AN LLC
- Limited Liability- LLC members’ liabilities are limited to the amount of money each has invested in the LLC. This means if your LLC is sued, your personal assets cannot be attached. This is not true for criminal behavior committed by a member, or for failing to follow certain business management rules. You also must maintain some corporate formalities, which include holding meetings or documenting actions in lieu of a meeting, keeping personal and business assets separate, issuing member certificates, and other issues.
- Ownership- The amount of money a member invests in the LLC may or may not equal their ownership in the company, unlike holding stock in a corporation. A person can be an investor, and not own much (or any) of the membership interest or have a say in day-to-day operations. Profits and losses can be split in any manner that the members agree to and spell out in their Operating Agreement.
- Management- LLCs aren’t required to have a board of directors. They may be managed by members or by a manager that is selected by the members, who may or may not be a member of the LLC. No annual meeting is required, unlike a corporation.
CONS OF AN LLC
- Raising Capital- LLCs have greater legal obligations when trying to raise additional money. Depending on the Operating Agreement, they must generally must have a vote of the members and/or buy out a departing member’s shares before they can be allowed to solicit money from a prospective new member. This can take time to do as, generally speaking, a meeting must be called. A Corporation, by contrast, can just go out and sell more stock, provided it has authorized more shares than it has issued and has outstanding.
- Not Every Type of Company Can Be an LLC. Examples of companies in California that may not be an LLC include financial institutions, attorneys, health care professionals, accountants, veterinarians, and other regulated industries.
- LLC Laws Differ from State to State. This can expose you to liabilities of which you may be unaware. If you operate in multiple states, this can be an issue, and you may incur additional expense hiring attorneys and accountants in multiple states to protect yourself.
- Taxes. Depending on your state personal tax rates, you could end up paying more in taxes if you are an LLC than if you are either a C or S corporation.
Need help choosing a business entity for your company? Nancy Lewellen can help you do this with ease, and works with your financial advisor to minimize your taxes. Contact her today at nyl@palladianlawgroup.com or 415-399-0993 for a free 15-minute consultation.