Considering the LLC for Your Business Needs

Tuesday, September 20, 2011

Among the myriad issues facing principals contemplating a new commercial venture, none is more straightforward than the question of which legal organization vehicle to use. While differences of opinion may abound regarding items such as selection of initial location, staffing and budgeting, the partners in any new venture are all hoping to achieve similar goals when it comes to selection of the formal business entity. Each venturer wants limitation of his or her respective personal liability, simplicity of organization, ease of operation and tax advantage. Given these criteria, the Limited Liability Company, or “LLC,” should be given strong consideration.

Traditionally, the Business Corporation or “C-corp” was the vehicle of choice for most businesses. The entity is relatively easy to form; a mere filing of articles of incorporation with the secretary of state does the trick. All shareholders enjoy limitation of liability, meaning they cannot be personally sued for debts incurred by the corporation, and thus in a worst case cannot lose more than their financial contribution to the corporation. The problem with the C-corp is that it requires most actions to be taken via a board of directors that must operate through the strictures of formal and often cumbersome bylaws that prescribe firm notice and meeting requirements.

Moreover, the C-corp subjects shareholders to double taxation; meaning that the corporation is taxed on income, and the shareholders are then taxed on the distributed dividends occasioned by that income. While some small qualifying C-corps can make an election pursuant to Subchapter S of the Internal Revenue Code to escape the twofold taxation, the “Sub-S” election does nothing to alleviate the burdensome and often unwieldy process by which the decision makers must operate.

The General Partnership requires no formal organization and is “pass-through” entity for I.R.S. purposes, meaning that only the partners and not the partnership are taxed. The problem is that relatively minor decisions will most likely involve a majority of partners and, more importantly, each partner is liable for the full amount of partnership indebtedness. While the term Limited Partnership invokes the thought of a limited liability entity, the general partners, those with day-to-day, hands-on business responsibilities, remain personally liable.

In contrast to the above options, the Limited Liability Company (“LLC”) is preferable on virtually all points. The LLC is neither a corporation nor a partnership, but rather enjoys the best aspects of both. The entity is formed via the mere filing of articles of organization and the following of uncomplicated publication requirements. Unlike the corporation, the LLC is not encumbered with the burdens of formal meeting requirements. It acts through one or more managing members and, unlike a partnership, both the managing and non-managing members benefit from limited liability. In addition to insulation from liability, the LLC is also a tax pass-through and thus shields members from double taxation. Like a partnership, the entity merely reports the members’ shares of profit or loss, thus reducing tax filing fees.

While specific and unique needs and circumstances must always be considered in making any decision, the LLC should prove to be the vehicle of choice for the overwhelming majority of small businesses.