The Benefits of an LLC
When you are deciding to start your own business, one of the first questions you have to ask yourself is whether you need to create a separate legal entity. For new and small business ventures, operating as a sole proprietor may be fine. However, if your original idea has grown and you are making a decent profit or if there are multiple parties involved, it may be best to create a unique entity with rules and structure. Once you have decided the business should be formalized, you have to determine whether a partnership, corporation, or limited liability company is right for you and others involved. LLCs have become popular in recent years because they offer some advantages over more traditional corporations.
Flexibility in Ownership and Roles
An LLC allows one or more individuals to own the business. If you will own your LLC yourself, you can make all of the business decisions. You are not required to work with a board of directors or shareholders like you would with a corporation. If you are forming the LLC with other individuals, you can draft an operating agreement that defines each person’s roles and duties in relation to the business. The LLC’s operating agreement allows for a tremendous amount of flexibility when building the structure of the business.
Custom Profit Sharing
Not everyone must contribute or profit the same way from the LLC. If there are more members than just you, you can all determine how the profits will be shared. Profits in a corporation are determined by the type and number of shares a person owns and partnerships often divide profits evenly. However, an LLC creates a custom profit sharing plan. You and other members can all decide to share equally in the profits or you may all receive a percentage of the profits proportional to the amount you invested.
While LLCs and corporations are formed similarly – with filing paperwork and paying a fee to the state – corporations have a great deal of paperwork and meeting requirements to uphold each year. Corporations must have a meeting to elect corporate officers and write bylaws. The board of directors is required to meet regularly and the shareholders must meet once per year. LLCs are not required to maintain such a strict meeting structure. The members of the LLC, which may just be you, decide on the internal structure and management of the business.
No Double Taxation
A corporation suffers from double taxation because the corporation’s profits are taxed first and then taxed again when distributed to shareholders as dividends. An LLC can “pass through” its profits to its members. The business’s profits are only taxed once after being received by the members.
However, you may be subject to self-employment tax through an LLC. It is crucial to speak with an attorney about the prospective tax consequences of a corporation or an LLC before deciding on which entity to create.
Contact a Business Formation Attorney for Advice
The entity you choose and the work you put into creating a solid and beneficial business and management structure can greatly affect your success. Before making a decision on whether to form a corporation, LLC, partnership, or remain a sole proprietor, speak to an experienced West Palm Beach business transactions attorney from the Law Offices of Larry E. Bray, P.A. at 561-571-8970.