Why an LLC?
The recent recession and market downturn of the late 2000s had a devastating impact on all kind of businesses, especially those just starting out. Banks and other lending institutions restricted the small business loans entrepreneurs needed to get their ideas off the ground, rising unemployment cut into the buying power of potential customers and the overall economic slump made it difficult for newly opened businesses to keep going.
To help against the expenses of starting and maintaining a business in such a difficult time, a growing number of people used the limited liability company designation. New LLCs increased 12 percent during the height of the recession, and experts say they expect the number to continue to grow as more people seek out the protection and flexible structure limited liability companies offer.
For those who do decide on a LLC designation for their business, there are many advantages. A limited liability company is a sort of hybrid company, carrying some characteristics of a partnership and some of a corporation, but it also lacks many of the difficulties or regulations placed on these other types of business. Corporations face double taxation and reams of paperwork and other regulatory requirements, but limited liability companies are able to avoid these requirements.
The “limited liability” aspect means that, unlike in partnerships, the owners of an LLC are not personally responsible in the case of a lawsuit or bankruptcy. They are also free from the highly regulated set-up of a corporation. Whereas corporations must hold regular meetings with minutes and formal resolutions, limited liability companies have no such restrictions. They can decide to meet quarterly or annually to discuss major projects, or not meet at all if they so choose.
Limited liability companies are also not bound to the same taxation regulations as partnerships. Instead of taxing the company itself, the IRS taxes the individual owners, who are referred to as members. The members pay personal income taxes on their profits, and can use losses to limit their own personal tax liability.
Forming an LLC is also easier and cheaper than other business classifications. There is a loose interpretation of the term “members,” so a limited liability company can be started by an individual or individuals, a foreign entity or an already existing LLC. Corporations can also be forming members of an LLC, which allows the new company to offer benefits like health insurance and also transfers some of the corporation’s legal protection to the LLC.
To actually start the company all the member or members must do is fill out a simple form known as articles of organization with their secretary of state, giving the name of the members and the company’s name. The fee with this form is nominal, and with just a few exceptions is usually less than $50.
The LLC designation is made to fit a wide range of businesses. Although banks and insurance companies are forbidden, as they are required to be incorporated under a state or national authority and the LLC does not satisfy this regulation, most other types of businesses are eligible for the limited liability designation. There are even different types of LLC designations meant to fit a wider range of businesses. A professional limited liability company is one that provides professional services like architecture, legal services and medical treatments, provided that all members practice the same profession. Businesses that have multiple entities can form a Series LLC. This is beneficial if the company has aspects that it would like to separate to give each part its own liability, a plus for businesses like real estate developers who want to give each property its own LLC.
Compared to a corporation, LLCs have existed for a short period of time. The business structure was first created in Germany just before the turn of the 19th century, but was not adopted in the United States until the 1970s when the state of Wyoming first officially authorized it. While this relative youth means there is some legal uncertainty concerning areas of a limited liability company’s operations as there are few court cases to create precedent, the LLC is still considered the easiest form of business to operate. Members can use attorneys or accountants to help meet requirements and meet regulatory needs, but business experts say this is not a necessary step.
People interested in learning more about LLCs or who want to access forms needed to get one started can check out our site.