Is a limited liability company (“LLC”) right for you? An LLC is a hybrid entity that takes benefits of a corporation and benefits of a partnership. That is, it protects against personal liability similar to a corporation, and has general partnership flexibility.
Advantages. There are no ownership restrictions on who may be a member and also no requirement that profits and losses get distributed to the members strictly based on their ownership percentages. An operating agreement should include terms to allow for any disproportionate allocations decided upon by the members of the LLC. There are less formalities with an LLC and members and managers of an LLC are not required to hold regular meetings, which reduces the amount of records and paperwork needed. There are also various management options available to choose from with a LLC, whether it be managed solely by the members (member-managed LLC) or the members may appoint various officers or designate one or more managers (manager-managed LLC). For tax purposes, profits and losses flow directly through the entity to the individual similarly to an S Corporation, unless the LLC chooses to elect a different tax status.
Disadvantages. In order to be treated as a partnership, an LLC must have at least two members. Although all states allow single member LLCs, the business is not permitted to elect partnership classification for federal tax purposes. From an accounting perspective, LLC’s can have complex partnership rules that may have tax implications, which means ongoing compliance costs. Earnings of most members of an LLC are generally subject to self-employment tax and since an LLC is not subject to double-taxation, the profits are automatically included in a member’s income. There is a lack of uniformity among limited liability company statutes, which mean operating in more than one state may mean your LLC will be treated differently. Additionally, if you will be raising capital, you may want to consider alternatives depending on the type of investment you are seeking.
LLC’s are great choice if you want to protect against personal liability, have pass through tax treatment and flexibility with respect to distributions, allocations and/or management and do not need large amounts of capital.
Melody Ashby is a Senior Attorney at Meyer Law, one of the fastest growing law firms in the United States. Melody helps companies with corporate and securities matters, trademarks, contracts, employment matters and capital raises. Melody is a mentor at tech incubators and accelerators across the United States. Learn more about Meyer Law here on our website + follow us on Instagram @loveyourlawyer