Should You Form An LLC?

The business owner landscape in the United States has gone through a number of permutations since the country's founding. At one time, farming was the leading industry in the U.S., and while there are still plenty farms, garden hoes and bushel baskets have largely been replaced by typewriters and office chairs.

Not only are there more types of businesses today, but owners also have more ways to organize their companies. For instance, in 1977, limited liability companies became an option for entrepreneurs to pursue as an alternative to sole proprietorships, partnerships or corporations. Today, according to some estimates, 66 percent of new companies are LLCs.

As their title implies, LLCs are companies whose liabilities are limited, the amount of which depends upon what's invested by its owners. As the U.S. Small Business Administration describes it, LLCs are the best of both worlds, providing the liability limitations that corporations enjoy along with the independence afforded to partnerships.

Here are a few of the other advantages that LLCs provide, as well as the disadvantages that you should also consider:

Unlimited number of owners permitted
While liability may be limited in LLC – which of course is a good thing – the same can't be said for its ownership structure. LLCs can have an unlimited amount of owners, which can't be said for other business entities. This can perk can be a compelling reason to form as an LLC for start-ups, as co-owners chip in their capital to get things up and running.

Greater tax freedom
Under incorporation, the business itself has to pay taxes. In other words, two returns have to be filled out. But as an LLC, the tax burden essentially "passes through," enabling owners to file on one tax return.

Simplicity redefined
A corporate structure undoubtedly has its advantages, but the development process takes a while, having to create various chains of command, such as a board of directors and a formal accounting of its shareholders. None of that is necessary as an LLC. Decisions can be made on the fly rather than after getting approval, which corporations know all about.

LLCs are not without their drawbacks, however.

LLCs don't have to deal with a board of directors.

Owners must pay self-employment tax
In some ways, the tax perks of LLCs are in the eye of the beholder. LLCs aren't taxed separately, but owners still must pay self-employment taxes because they're considered to be self-employed in the eyes of federal law. The profits LLCs make may not be separately taxed, but the net income earned in a given year is.

Perpetuity limitations
Corporations may have a lot of paperwork, but the extra hoops pay off by it being forever established, regardless of what happens to its owners. LLCs don't have this type of assurance. If one person leaves prematurely – and this potentiality isn't accounted for in the original agreement – it may force a change of the company's structure.

Open to interpretation
As previously mentioned, LLCs haven't been around for very long. Because of this, many states have their own laws on the books for how LLCs are treated and what's required of them. For example, an LLC's tax burden in one state may be very different in another. States may also have specific regulations that LLCs must satisfy in order to register.

At the Law Offices of Donald W. Hudspeth, your business is our business. In addition to litigation disputes, strategic planning and asset protection, we provide the expertise entrepreneurs need to decide on an organization form, be it as an LLC, C-Corp, S-Corp, sole proprietorship or partnership. And though we're based in Arizona, our services span the globe.

Categorised in: Arizona LLCs, Business Law

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