When people think of forming a business, they often think that their options consist of forming a corporation or going it alone as a solo proprietor. There is a middle ground in the world of business entities that is often overlooked when people are deciding what kind of entity to create – the limited liability company, or LLC.
Similarities Between LLCs and Corporations
One reason why the LLC is overlooked may be because it has many similarities to a full blown corporation (sometimes called a “C-corp.”). Like a C-corp, an LLC is allowed to own property in its name, make money in its name, and open accounts at financial institutions in its own name.
LLCs provide the overriding benefit of forming any company, which is personal protection for its owners or members. That means that if the LLC is sued, the members will not have personal liability for (and will not have to satisfy from their own, personal assets) what the LLC may end up owing. Of course, just like corporations, owners and businesses must respect business formalities, like separate business accounts and expenses, to enjoy this personal protection. Partnerships and sole proprietorships do not have the same personal protections.
Taxation of LLCs
One difference between a C Corp and an LLC is taxation. A C-corp is taxed separately from its owners. That means that there is a risk of double taxation – taxes on what the company makes and taxes on what you personally earn from the company.
With an LLC, there is pass through taxation, which means that the business does not pay a separate tax in addition to what the owner or manager pays. Whatever the business makes or loses are your profits or losses. The downside is that you may pay self employment taxes, which also may include paying for social security and Medicare.
LLCs Are Flexible
Rules for an LLC are more flexible than that of a traditional corporation. An LLC has members, rather than shareholders, and does not require boards of directors. An LLC is allowed to name officers, but the formal processes by which a C-corp must elect and manage them is eliminated.
A LLC is governed by an operating agreement, which is a contract among its members. The operating agreement can say almost anything the owners or managers want it to, with few legal requirements needed. Like a corporation’s bylaws, the operating agreement of an LLC is your company’s handbook listing the rules and regulations under which it operates.
The operating agreement may include details regarding what happens when a member of an LLC leaves. It will also define the roles and responsibilities of members and managers, and outline the voting rights of each member.
Do your business documents say what you need them to or do you need advice about forming a business? The Colorado employment and business law attorneys at Ball & Barry law are here to answer any questions you may have.