A Limited Liability Company (LLC) is a legal tool that can be used to insulate risky assets from your safe assets. Examples of risky assets would include rental property‚ commercial property‚ cars‚ boats‚ airplanes‚ etc.‚ as well as business ventures you might undertake. The LLC structure allows for complete control of the asset and pass through taxation to the members (owners) of the LLC (for income producing assets). For asset protection purposes‚ the LLC acts as a legal shield in the event that the asset owned by the LLC becomes a source of liability. Owning that asset through the LLC limits the liability of the members to only the assets of the LLC while protecting the members' personal assets from creditors.
LLCs offer real benefits, but many other factors exist that must be considered and addressed in an appropriate and strategic manner. At JCloud Law, P.C., our attorney will work with you on each and every aspect of starting and operating a successful limited liability company. Contact us today at 480-378-3543 / 858-299-0440 to schedule a free 15-minute consultation and to learn more about the benefits of retaining a business attorney in Arizona & California.
What is a Limited Liability Company (LLC)?
A limited liability company is a business structure that combines features of a sole proprietorship or partnership and corporation. Like a company, the owner's personal liability in an LLC is limited. However, its tax situation is typically the same as a sole proprietorship or partnership.
LLCs can have an unlimited number of owners, called members. Each member owns a percentage of the business that is typically proportionate to their investment.
The specific regulations around forming and running an LLC vary between states.
Differences between LLCs and Corporations
While both limit the personal liability of their members (in the case of an LLC) and shareholders (in the case of a corporation), there are some key differences between the two structures.
Taxation
Corporations are separate tax entities, filing and paying taxes at a corporate level. In comparison, LLCs are pass-through entities. They can elect not to pay federal tax, in which case the profits and losses are passed to owners who then pay tax at the personal tax rate.
Governance
LLCs use an operating agreement to set out how it will be governed, including management structure, restrictions on buying or selling shares, profit sharing, and its dissolution. Operating agreements are flexible and can be designed according to the members' wishes. Corporations, on the other hand, are required to formally adopt bylaws according to the relevant state law.
Level of Administration
Corporations must comply with more rigid government rules and regulations that LLCs do not have to follow. These rules and regulations involve stricter reporting and administrative requirements.
Advantages of an LLC
There are many advantages that flow from forming a business as an LLC. Below are descriptions of a few of them.
- Limited liability. One of the biggest advantages of an LLC is that it limits the liability of owners to their investment in the business. Owners can't be held personally liable for a company's debts and their personal assets are protected in the event an LLC can't pay a creditor, goes bankrupt, or is subject to a lawsuit.
- Taxation. LLCs can be taxed as a sole proprietorship, partnership, or corporation. By default, an LLC is a pass-through entity. This means taxation is passed to the owners who pay taxes on the profits (or losses) via their personal tax return, avoiding double taxation. In some circumstances, an LLC can elect to be taxed as a corporation. This flexibility allows members to choose a taxation structure best suited to their situation.
- Flexible management structure. When it comes to management, the members of an LLC can choose to either share management responsibilities or act like passive investors by nominating one or two managers to run the business (either members or non-members).
- Less administration. It's typically easier to set up and run an LLC than a corporation. There's less paperwork involved and, unlike a corporation, an LLC isn't required to hold board or shareholder meetings or appoint officers and directors.
Whether one of the above or another advantage benefits your business depends on the business itself and what your goals are. That's why speaking to an attorney can be critical to the success of your company. Our business lawyer in Arizona & California will help you align your goals with the benefits associated with any and all business structures so you can be confident you form and operate your business under the most advantageous structure available to you.
Disadvantages of an LLC
Some disadvantages exist with any given business structure. Here are a few that you should be aware of if you intend to form an LLC.
- Set-up costs. Forming an LLC often involves filing fees. It can be more expensive to set up an LLC than other business entities, like a sole proprietorship or partnership. Many states also charge LLCs annual fees and taxes.
- Forced dissolution. In some states, an LLC must be dissolved when a member leaves, dies, or goes bankrupt. In comparison, a corporation can exist in perpetuity.
- Transfer of ownership. It can be more difficult to transfer the ownership of an LLC compared to a corporation or some other business entity.
- Potential investment limits. External investors often prefer investing in a corporation rather than an LLC. This preference is because an LLC is often viewed as a more complicated structure in terms of taxation and managing outside investment.
Do You Need a Lawyer for an LLC?
While there's no legal requirement to hire an attorney when forming an LLC, it's a good idea to speak to a lawyer to confirm whether it's the right business structure for your circumstances.
They can also assist you with forming an LLC, including registering your business and drafting documents such as the operating agreement. They can also often continue to act as your registered agent, receiving any legal documents on behalf of the LLC.
If your business is complex or involves especially risky transactions, a lawyer can work proactively to avoid legal mistakes on your behalf. If a legal issue arises, they will walk you through the process, representing your interests throughout it.
Contact a Lawyer in Arizona & California Today
Make sure your company gets started on the right legal foot by making sure the business formation you choose, whether it's an LLC or another entity, is right for your business idea and goals. Get clarity and strong representation for a business already established as an LLC. Contact our business attorney in Arizona & California either by using our online form or calling us at 480-378-3543 / 858-299-0440. You can schedule a free 15-minute consultation to get the answers you need to some of your most pressing legal questions related to your business.