You Down With LLC? Yeah You Know Me!
WHY YOUR FIRST CHOICE SHOULD BE THE LLC
When starting out with any new venture its generally important to be flexible. Flexibility is important, whether it’s with your time, your schedule, or trying to learn something new. If you don’t learn anything else from this post we want you to know that the LLC is an extremely flexible entity choice. We also wrote a post the other day comparing LLCs to other entities. You can check it out here.
The Cool Kid In School
For the reason of being extremely flexible, LLCs have recently been the most popular entity choice over a partnership, S-Corporation or C-Corporation. Everyone wants to be popular, right? The origins of the LLC entity lie in partnership law, which has a long legal history. In the mid to late 90’s states started adopting limited liability company statutes and the entity type grew like wildfire across the country.
As stated above the main benefit of the LLC is amazing flexibility. This is what makes the LLC so popular. A skilled corporate attorney can literally structure the entity a number of ways and alter things like the distribution of cash and other assets, the allocation of income or losses or change the way the LLC operates to make it like a corporation, with a board and officers or make it more like a general partnership, with all members serving as managers. Options abound! It’s like the utility tool of entity types. The fees to set up and to maintain on-going operations are also very reasonable compared to other entity types, making the LLC an great option to keep costs down and maintaining formalities.
The entity also has amazing tax flexibility! An LLC is by default a pass through entity. This means taxes flow directly to the members and not taxed at the company level. Alternatively, you may also elect to be taxed as a C or an S corporation. So you can choose to be taxed however it suits your particular situation best.
Blockin’ Out The Haters
Like any legal tool, there are some applications where using an LLC would be inadequate. So if you try to Google “disadvantages of an LLC” you are sure to find some who are not a fan of the LLC. So, in the interest of fairness, here are some downsides:
The LLC may not be recognized as affording an owner as much liability protection as a corporation. Some states courts have held that a one owner or “single-member LLC” is not protected against personal liability. So it may be best to make sure you have at least one other member.
Also, as you get more complicated with the structure, the complexity from a governance and tax standpoint only increases. Granting options to employees and consultants is also possible, but can be more complicated than in a conventional stock corporation.
There is also somewhat of a myth that investors and venture capital funds hate investing in LLCs. However, in our experience, if your Company is attractive and appealing enough to get the attention of potential investors, their smart lawyers can navigate any downside to investing in an LLC. So, we will begrudgingly agree that this may also be a possible downside to the LLC.
Here To Help
A primary reason we created Briefcase is to be the resource for you when trying to decide which side of the LLC fence you come down on. Briefcase’s attorneys study and evaluate these issues regularly and would love to help you make the right decision. We promise, you wont get a pushy salesmen lawyer trying to make you choose what earns the highest legal fees, we are only here to help and serve you. So if you have questions about what type of entity you should form sign up at www.thebriefcase.co and let us know how we can help you.
Questions: Does an LLC seem like the best fit for your company? What are some challenges with your tax situation that could use some flexibility? What’s your main concern when choosing an entity type?