Limited Liability Companies became a popular legal entity choice for small business owners in the early 90s. Best described as a hybrid between a corporation and partnership, an LLC offers numerous advantages, with relatively few disadvantages. An LLC is easier to form and operate than a corporation, while still providing members the same limited liability. An LLC offers flexibility and has less formality than a corporation, allowing members to structure the LLC to best meet the needs to the business. Some questions still persist about this business entity.
How are LLCs taxed?
LLC owners, commonly referred to as members, report LLC income or loss on their personal income tax returns. If an LLC has multiple members each member reports on his or her own 1040 based on the percentage of ownership in the LLC. The LLC is not taxed on the entity level. That means there is no double taxation as there would be in a corporation.
Is an operating agreement necessary?
Yes, in fact in New York, as well as many other states, it is required. It is also a good idea, even in a single member LLC. The operating agreement defines each member’s role and ownership share, rights and responsibilities of the members, and allows members to customize the structure of the LLC to best suit the needs of the business. The operating agreement also enables the members to override state default rules. Of particular importance to single member LLCs, an operating agreement creates an extra layer of liability protection. It can prevent a court from viewing the LLC as a sole proprietorship.
How is an LLC structured?
An LLC can be structured in any way that best suits the business. It can resemble a corporation or a partnership. It can be member managed or manager managed. The structure depends on the needs of each particular business.
How is an LLC different from a partnership?
While an LLC can resemble a partnership, there are significant differences. A general partnership is formed whenever two or more people agree to go into business together. It is very easy to form, and may even be formed inadvertently. Partners are responsible for day to day operations of the business, while LLC members can choose to be managed by managers. Partnership does not offer the limited liability protections of an LLC. Partners have unlimited liability for the business as well as for their partners actions.
Does a corporation have any advantages over an LLC?
An LLC is an attractive business structure for many, but does have some drawbacks and a corporation may be a better fit. In New York a new LLC must be published in two different publications for six consecutive weeks. The cost for this varies and can get expensive, particularly in New York City. A corporation does not have this requirement.
A corporation may be a better choice if the business will have numerous employees, since it can be difficult to structure certain employee “perks” with an LLC. Additionally, if the business plans to attract investors, particularly venture capitalists, a corporation may be a better choice since investors prefer that structure.
This post is for informational purposes only. It is not intended to be, nor should it be construed, as legal advice. Always consult an attorney, licensed in your state, before taking legal action.