Now that you have decided to start your new business venture or you are looking to form a business entity for an existing business, let’s discuss if forming an LLC (limited liability company) is right for you.
You should consider forming an LLC if you are concerned about personal exposure to lawsuits arising from your business. For example, if you decide to open a business that deals directly with the public, you may worry that your commercial liability insurance won’t fully protect your personal assets from potential slip-and-fall lawsuits or claims by your suppliers for unpaid bills. Running your business as an LLC may help you sleep better, because it instantly gives personal protection against these and other potential claims against your business. Not all businesses can operate as LLCs. Businesses in the banking, trust, and insurance industry, are typically prohibited from forming LLCs.
While the S corporation’s special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners.
An LLC may offer several classes of membership interests while an S corporation may only have one class of stock.
Any number of individuals or entities may own interests in an LLC. Ownership interest in an S corporation is limited to no more than 100 shareholders. Also, S corporations cannot be owned by C corporations, other S corporations, many trusts, LLCs, partnerships, or nonresident aliens. Also, LLCs are allowed to have subsidiaries without restriction.
An LLC operating agreement allows you to structure your financial and working relationships with your co-owners in a way that suits your business. In your operating agreement, you and your co-owners establish each owner’s percentage of ownership in the LLC, his or her share of profits (or losses), his or her rights and responsibilities, and what will happen to the business if one of you leaves.
Although most states’ LLC laws don’t require a written operating agreement, you shouldn’t consider starting business without one. Here’s why an operating agreement is necessary:
LLC owners are not required by state LLC statutes to hold an annual meeting and keep minutes. However, the LLC structure allows members to determine how an LLC will be structured and operated by executing an operating agreement. In this document, members may choose to include a clause requiring an annual meeting and a requirement to keep minutes at the annual meeting.
While LLC owners enjoy limited personal liability for many of their business transactions, it is important to realize that this protection is not absolute. This drawback is not unique to LLCs, however — the same exceptions apply to corporations. An LLC owner can be held personally liable if he or she:
This last exception is the most important. In some circumstances, a court might say that the LLC doesn’t really exist and find that its owners are really doing business as individuals, who are personally liable for their acts. To keep this from happening, make sure you and your co-owners:
A good liability insurance policy can shield your personal assets when limited liability protection does not. For instance, if you are a massage therapist and you accidentally injure a client’s back; your liability insurance policy should cover you. Insurance can also protect your personal assets in the event that your limited liability status is ignored by a court.
In addition to protecting your personal assets in such situations, insurance can protect your corporate assets from lawsuits and claims. Be aware, however, that commercial insurance usually does not protect personal or corporate assets from unpaid business debts, whether or not they’re personally guaranteed.
I hope this gave you a basic knowledge and understanding about forming an LLC. At Watkins & Co. we can assist you with setting up an LLC or any other type of business entity and can get you up and running for a wonderful 2015 and beyond business experience!
BY: Raizy P. Grossman