When it comes to business formations, many business owners wonder about the benefits of forming an LLC for their companies. Three considerations make LLCs (“limited liability companies”) the choice for many entrepreneurs starting a business.
Flexibility: LLCs offer flexibility in management structure and decision making. As far as management structure goes, an LLC can be run with minimal formalities among its members or a corporation-like hierarchy with officers (president, vice-president, etc.) and internal decision-making bodies similar to boards of directors. Decision making is equally flexible with an LLC. Under California law for example, LLCs are not required to hold meetings to make business decisions. However, an LLC may require its members to hold regular meetings, keep minutes, and vote according to strict, predetermined rules.
The key to this flexibility is the LLC’s operating agreement, a document which for the most part can be shaped to fit the managing styles of the LLC’s members. The only catch is that regardless of how informal the management structure is, the LLC’s members must strictly abide by the operating agreement in order to maintain the benefits of forming an LLC.
Income Taxation Considerations: LLCs allow owners the option of being taxed as a partnership or to be taxed as a corporation. Choosing taxation as a partnership results in “pass-through” tax liability in which the income, gains, losses, deductions, and credits of the LLC pass through to its members for reporting on their personal income tax returns. Business owners with more complex management structures may elect to have their LLCs taxed as corporations.
Limited Liability: “Limited liability” refers to shielding a business owner’s personal assets from the debts and liabilities of the business, and is arguably the main reason for forming an LLC. To maintain the limited liability status of the LLC, the ownership must:
- File all necessary business formation documentation with the state(s) in which the business will operate: In California, business owners are required to file paperwork with the Secretary of State (“SOS”) as well as with the California Franchise Tax Board (to pay the yearly minimum franchise tax of $800) in order to form an LLC.
- Operate the business as an entity separate from themselves: The #1 rule for maintaining limited liability status is to operate the LLC as an entity separate from yourself. The best way to do this is to avoid commingling funds between the business and its owner(s)’ personal bank accounts.
- Observe all legally required formalities associated with running the LLC: The legally required formalities are minimal for LLCs and in most cases, the members need only observe the rules they agreed to abide by in their operating agreement.
If an LLC sounds like a good fit for your business, visit Creative Vision Legal's LLC business formation page to get started.