A Limited Liability Company (LLC) is one of the newest types of legal business structure that combines the characteristics of other business types.
It is often referred to as the hybrid of a sole proprietorship, partnership, and a corporation that provides the limited liability of a corporation and combines the pass-through taxation and operational flexibility of a partnership.
Due to its newness, there may be various issues that can arise when businesses in form an LLC.
When a business decides to form an LLC, its pros and cons should be considered first. This is to ensure that the owner understand what the implications this move brings.
The organizational structure of the company as well as its operational processes would definitely be affected by this choice of business type.
Consider these factors when starting or forming an LLC:
A LLC is very famous for its operational flexibility.
The "owners" of an LLC are known as "members". With this type of structure, one member or more can establish the business easily. It can be formed online, at the office, or at home.
Also, this allows full management or control of the business with an operating agreement made by the owner and other members.
The flexible control over the operating agreement enables the company to establish its own rules and protective provisions for all its members, as permitted by state statute where the LLC was organized..
Another benefit when a business chooses to form an LLC is the informal or less complicated business process. Unlike a corporation, an LLC can operate in an informal manner and is subject to fewer regulations. It does not have many formalities to maintain. This spares the members from attending annual meetings.
Also, certain documentation are not strictly required thus there will be much less administrative paperwork. However, it is still advisable to keep records of business transactions for audit purposes or for any other future need.
Protection of assets is one of the most important advantages of an LLC. In this type of business, the members of the company are not individually liable for any of the company's financial obligations such as debts of the LLC, depending on state shield laws.
Passed through taxation is also automatic and therefore profits and losses are passed through to the member personal income without facing corporate taxes. This means profits are taxed personally at the member level and not at the LLC level, unlike corporations where profits are taxed twice.
Members of an LLC can consist of individuals, partnerships, trusts, estates, organizations or other business entities. There is no limit to the type or number of members in most states.
Businesses that opt to form LLC may also face some limitations.
Even if this business type is very flexible, there are also restrictions to its membership and operation. First, if the LLC reaches more than 20 members, there is a definite need for a manager. A manager is needed to oversee the progress of the business and to keep it organized. Hiring a manager for the LLC presents additional expenses to the business.
Also, the LLC may be dissolved if one member quits. However, there are provisions in the state laws which can address this problem.
The LLC can also restrict the flow of the business profits and stocks. The LLC is not authorized to split the overall profit and loss to its members.
Aside from that, raising financial capital in a limited liability business is more difficult. This limitation results in the investors' preference for a corporation instead of an LLC with a view toward an eventual IPO.
Additionally, the members cannot sell and issue stock certificates.
Lastly, the LLC may pose some fee and taxation issues. This involves payment of taxes for the limited liability benefit of an LLC business.
Also, the annual fee of LLC in some states is higher compared to other structures of business.