Q: I'm starting a new business and have heard quite a bit about something called an LLC. How can I determine if this is the right legal form for my new business?
A: A limited liability company (LLC) might indeed be the right legal form for you. An LLC is a blend of some of the best characteristics of corporations, partnerships and sole proprietorships. Currently all 50 states have enacted LLC laws, so wherever you plan to do business, this choice would be available to you.
Almost any type of business may form an LLC-except, in some states, businesses formed to engage in banking or insurance, businesses comprised of licensed professionals, such as doctors, lawyers or accountants.
Also, you'll need two people (members) to meet the state requirement in many states and to meet the basic federal tax law requirements to obtain the flow-through tax provisions that are one of the advantages of an LLC.
There are four main benefits to forming an LLC:
1. Personal protection from business debts and claims (limited liability)
2. Flow-through tax advantages of a partnership-that is, profits or losses that flow through directly to the members
3. Simplicity of operation without the statutory necessity to keep minutes, hold meetings or create resolutions as with a corporation
4. Flexible distribution of profits and losses
Obviously, some of these benefits are available under other business forms, but no other form offers all of them except the LLC.
Here are the circumstances in which you might benefit from an LLC structure:
- If you're thinking about forming an "S" corporation: An "S" corporation is taxed in the same way as an LLC, but it has some restrictions on the number and types of shareholders, how profits and losses can be allocated among the owners, and the kinds of stock they can issue to investors. The LLC has none of these restrictions.
- If you're thinking of forming a partnership: A partnership is taxed in the same way as an LLC but doesn't offer the limited liability to all partners an LLC offers to all its members.
- If you're planning to start a business that will hold real property that will appreciate: both "C" corporations and their shareholders are subject to tax on the appreciation when assets are sold or liquidated. An LLC and its members are not subject to this double taxation.
- If you're forming a business in which you'll have investors who will want to be paid back their investment before the other owners receive anything: Instead of being restricted to dividing up profits proportionate to the percentage of ownership (as in a corporation), an LLC allows members to decide what share of the profits and losses each owner will receive.
Forming an LLC is similar to forming a corporation. Members file articles of organization with the secretary of state in their state capital and, in some states, a newspaper notice. Additionally, LLCs should create a written operating agreement that spells out the rights and responsibilities of LLC members and/or managers.
Although an LLC offers few restrictions and some substantial advantages, as when making any business decision, a consultation with a tax specialist is always a good idea. Assistance at no charge is always available from the local Small Business Development Center office in your area. Call the SBA at (800) U-ASK-SBA to find the one nearest you.
Carlotta Roberts has a J.D. degree from Atlanta Law School. Having worked in the areas of business organization, contracts and employer/employee relations, she's been a consultant to small-business owners since 1981. She worked as a staff attorney concentrating in employment law issues before joining the Small Business Development Center national network in 1986. Currently area director for the Kennesaw State University Small Business Development Center near Atlanta, she has developed two nationally recognized programs: The Cobb Micro Enterprise Council, which won the Vision 2000 award for small-business development in 1999, and the Franchise Institute, developed to provide assistance to franchisees.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.