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Limited Liability Company – The Newest Business Structure

For many small businesses, incorporating isn’t a feasible solution – and sole proprietorship status doesn’t offer the protection that they need. For years, these small business owners either had to form S corporations, or remain unprotected as a sole proprietorship. Now, they have another option – the Limited Liability Company, or LLC. There are many advantages in choosing to form a limited liability company, as opposed to an S corporation or sole proprietorship, but there are some disadvantages as well.

An LLC is faster, and usually cheaper, to form than a corporation is. They are typically formed by filling out and filing one simple form. LLC’s are very informal, in that they are not required to hold annual shareholder meetings, they are not required to keep records of any meetings, and they offer business owners much more flexibility than a corporation does. Members can determine how profits and losses will be split, and the split does not have to be in direct relation with the percentage of the company that a member owns.

LLC’s provide the same protection from liability that corporations enjoy. LLC’s also enjoy the same tax advantages that S corporations enjoy, in that the income and expenses are passed directly through the LLC to the owners or members, which eliminates any possibility of double taxation. LLC’s do not issue stock. Instead, they are owned by members, and each member owns a specific percentage of the company, as set forth in the LLC agreement.

Unlike S corporations that are limited to 75 shareholders, LLC’s can have an unlimited number of members, much like C corporations. The members of an LLC are not as limited as those of an S corporation are either. S corporations cannot have non-U.S citizens as shareholders, but LLC’s can have non-U.S. members. Where S corporations only have one class of stock, LLC’s can have many different classes of ownership, and the pass through percentage for income and expenses is determined by an agreement among the members in the LLC’s operating agreement.

The disadvantages of an LLC are limited, but they do exist. Membership in an LLC is not freely transferable. For instance, shares in an S corporation can be sold at the will of the shareholder, without approval from the board of directors. Membership in an LLC cannot be sold without the approval of the other members. Some states require at least two people to form an LLC, and the existence of the LLC is not perpetual. Some states require LLC’s to list a dissolution date in their articles of organization, and the death of a member can cause the LLC to automatically dissolve. LLC’s usually dissolve after 30 years.

While LLC’s are suitable for an astounding number of small businesses, they aren’t for everyone. LLC’s are typically suited to small business that will have between one and three owners, but as the business grows, the benefits of incorporating may become more attractive. Furthermore, some businesses won’t meet the requirements of an LLC, and must form a corporation instead.