Understanding the Pros and Cons of Organizing as an LLC

You’ve finally acted on a longtime ambition to start your own business, or perhaps you already run a sole proprietorship and want to separate your personal assets from those of the business. Your next step is to decide what type of company to form. It’s a decision that impacts how the business is run and taxed, and more importantly, your personal liability if a problem ever arises.

Many entrepreneurs opt to form a limited liability corporation (LLC), a hybrid business structure that combines aspects of both a sole proprietorship and a corporation. Relatively easy to start and offering a myriad of advantages, LLCs are favorites of business owners for good reason.

Limited Liability

The biggest advantage of LLC incorporation is the limited liability of its members. In general, you cannot be held personally liable for business setbacks. This means that if there are substantial revenue losses or litigation occurs, your personal assets cannot be seized to pay the LLC’s debts and obligations. This protection remains in place so long as the LLC maintains good business practices and members keep business and personal financials completely separate. Otherwise, a judge can decide that the LLC structure doesn’t protect personal assets, an action called “piercing the corporate veil.”

Easy to Set Up and Run

LLCs are relatively easy and inexpensive to set up. In Virginia, you file Articles of Organization with the Virginia State Corporations Commission and pay a filing fee of $100. Although the state does not require LLCs to have an operating agreement, it is highly advisable, and a Virginia business attorney can help you draft the necessary paperwork. This agreement is easy to change: members only have to reach a consensus, and there is no need to make a filing with the state.

Unlike corporations, LLCs are not required to hold annual meetings, keep minutes, and record resolutions, making them easier to operate. Because there are significantly fewer laws involved, LLCs can accommodate required changes without having to make numerous amendments to any articles of incorporation.

Flexible Management Structure

IRS regulations do not restrict the membership of a standard LLC, which can be unlimited in number and include different legal entities such as partnerships and certain types of  corporations.

Taxes and Subchapter S Election

LLCs have multiple tax options because the IRS disregards their entity status for tax purposes (the entity is formed at the state level but the tax elections are conducted at the federal level). If it has only one member, for example, it can choose to be taxed as a corporation instead of a sole proprietorship, and then make a Subchapter S election. This way, the single-member will be paid a reasonable salary while avoiding self-employment tax.

While taxes are an important element of any business, our law firm stresses to entrepreneurs the importance of choosing the entity first, and only then deciding how you want to be taxed. As Attorney Jim Wilson often says, ““Don’t let taxes drive your business decisions. In fact, pray for the day you can write a million dollar check to the IRS—that means you have done very well.” This is just as true for an LLC as it is for a Corporation. Please keep an eye out for an upcoming blog expounding on some of the key tax elections available to entrepreneurs seeking to form an LLC.

Drawbacks to Consider

Limited liability corporations are not without their disadvantages. They include the following:

  • Members are not permitted to pay themselves wages, and since most businesses require several years to become profitable, the inability to pay themselves wages means members may not be able to profit from the LLC for some time.
  • LLC stock is not publicly traded. This can be an advantage in that members can freely make business decisions without consideration of stockholder concerns, but can also be a disadvantage when it comes to raising capital for the venture.

Although not without drawbacks, LLCs are an attractive option for business owners who are seeking personal liability protection, but with more ease of formation and flexible operation prospects than a corporation.

The Wilson Law Group, PLC is dedicated to providing top-notch legal services to Virginia’s business owners, including discounted rates for veteran clients. For a free consultation, please visit us online at www.wilsonlawgroup.net or call our office at 804-864-5268.

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Wilson Law Group

Jim Wilson is the founder and principal attorney of the Wilson Law Group. For the past 25 years he has been combining legal dexterity with an entrepreneurial mindset to help aspiring and established business owners start, finance, buy, sell, and run their companies.

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