There are many ways to structure a business. A Limited Liability Company is one of the most popular methods small businesses use, with other options including sole proprietorship, partnership and corporation. This blog previously discussed the basics of the four business structures, but starting a business is a complex process that requires thorough research to know what fits your needs.
The LLC is a hybrid business model that protects personal assets better than a partnership and allows for flexible income shares like a corporation. Most small businesses will consider an LLC, an S Corporation or a partnership model. LLC is popular because it’s to manage than other models, while giving more flexibility on how you operate.
Business models are complex and customized to fit your own business plan, which may include production, retail, hospitality, or goods and services. Because there are so many diverse needs for any business, this blog looks to provide general information for anyone looking to get a startup company off the ground.
Some pros of the LLC
Liability is a major concern for most business owners, and it’s addressed in the name of an LLC. An LLC offers protection of personal property. By creating a business that is separate from the individuals who own it, debt belongs to the company and not the owner. This means individual property like a mortgage is not in danger if the company loses money. Even if you never expect to incur much debt, there is always risk from non-business related matters. If a visitor, client or passerby slips and falls on your property, you could be liable for a significant personal injury lawsuit unrelated to the nature of your business.
Income distribution – how you get paid – is another advantage to the LLC. Like a corporation, there are different payment models for different levels of owners or investors. An LLC does not pay federal tax while a corporation does. In an LLC, the company earns income, pays investors or owners, and then the individual’s pays personal income tax. The corporation model experiences double taxation, which is when both corporation and investor are taxed separately.
Some cons of the LLC
In legal terms, LLC is a relatively new concept. Wyoming was the first state to introduce the model in 1977 but it didn’t reach much of the country until the 1990s. Because it’s not as institutionalized as other business models, there are more legal loopholes for business practices.
One notable issue is interstate business. Each state has unique laws to define and regulate how an LLC can operate. If you are near a state border or plan to do business across state lines, there will be extra challenges.
While the LLC model allows for investors and multiple owners, the shares are not as easy to transfer as in a corporation. If you expect significant movement of financers, an LLC may not be the right model for you.
Build to last
Starting a business is a major investment of time, capital and energy. Like any creation, the end product is only solid when it’s built on a strong foundation. Anyone considering an LLC can benefit by consulting with a business lawyer to discuss how the unique regulations and flexibility of the model fits with your own business needs. While many say an LLC is easier to work with, there are many steps in the process. A single misstep can change liability, income distribution or another part of your business that’s essential to its long-term success.