Choosing the Best Business Entity for Your Business
When starting a business choosing a business entity can be confusing. Whether you choose a corporation, a limited liability company (LLC), or some form of partnership, the type of entity you select will depend on a variety of factors including your desired management structure, operational goals, and tax considerations.
If you are starting or managing your own business, a limited liability company (LLC) will likely be the best entity for your business to grow. An LLC is a business entity permitted by state law, so when forming an LLC it is important to review any state specific laws, regulations and requirements.
An LLC will allow you to manage your business and protect your personal assets, much like a corporation, but without the rigid formalities of the corporate form. An LLC will give you the flexibility to structure your company and operations in a manner that works best for you. The owners of the LLC are called “members” and the individual(s) responsible for the day-to-day operations of the LLC are called “managers.” An LLC can have one or more members and one or more managers. Generally, the member(s) and manager(s) can be an individual, group, or entity chosen by the LLC members.
An LLC can be member-managed or manager-managed. A member-managed LLC permits all the members to participate in the day-to-day operations of the LLC. Each member has authority to act as an agent of the LLC and each member has a vote in the LLC’s business decisions. A manager-managed LLC gives the authority of the member(s) to the manager or managers, who become agents of the LLC and are responsible for day-to-day operations of the LLC.
Whichever management structure you choose, it is important to have an Operating Agreement that clearly defines the decision rights and authority of the member(s) and manager(s) of the LLC. It defines which decisions must be made unanimously or by a simple majority of members and/or managers. The Operating Agreement will outline the voting rights and requirements of the LLC, the process for dispute resolution, how profits/losses will be distributed, how additional managers or members may be added to the LLC, and numerous other considerations.
In short, the Operating Agreement is the playbook for your LLC. You will have a lot of flexibility in defining the key management provisions of the LLC and it is an essential document to ensure that the managers and members of the LLC are all on the same page about how the business is to operate.
When considering whether to starting an LLC, below is a list of four main benefits an LLC can offer you and your business:
- Liability protection: When an LLC is formed and properly maintained, you and your family’s personal assets will be shielded from any creditors or judgments against the business.
- Easy to maintain: In order to maintain the protections of an LLC, you will have to remain in “good standing” in the jurisdiction(s) of which you do business. Generally, this requires the filing of an annual report with the jurisdiction’s secretary of state’s office and paying an annual fee and/or tax. The annual report is used to update secretary of state’s office of any changes related to the business (i.e., new manager(s), new principal place of business, etc.) and most often this can all be done online.
- No double taxation: Unlike some business structures, LLCs can have “pass-through taxation” meaning that profits are taxed only at the individual level, not at the corporate level. Generally, the LLC’s profits and losses can be reported on your individual tax returns.
- Ownership/Membership interests are easily transferrable: An ownership or membership interest in an LLC can be easily transferred to others. As your LLC grows, you can easily seek out investors to support your business without having to take on management responsibilities within the LLC.
For these reasons, an LLC is often the most appropriate and popular entity for starting your business. Along with an operating agreement that clearly defines the roles, rights and responsibilities of the members and managers an LLC is often a good early step to start a business. LLC’s are also relatively easy to set up however it is important to properly fill out the paperwork and maintain the LLC through annual filings with the state.
Note: The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
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