Here is a great article by Dan Mattia that I pulled from VETLIKEME. Mattia makes several great points that we discussed in Module 4 of Entrepreneurship for Transitioning Veterans. As you know from class there are several different legal structures from which you can choose when organizing your small business. Each of these has advantages and disadvantages related to liability, taxation, and future funding. The bottom line is to do your reseach and consult with an attorney.
Mattia writes --- Your thriving small business may still be small, in term of revenue and staffing, but it’s developed to the point where it needs a little more legal and financial structure. You can take the leap to creating a full corporation, under such designations as S-Corp or C-Corp. Limited Liability.Yet there’s another option, to create an LLC, or Limited Liability Company.
An LLC is less onerous to create and sustain a corporation and yet offers more structure and legal protection than continuing to run your business without much if any formal company status.
To help you decide whether an LLC should be in your enterprise’s future, here’s a rundown of its advantages:
As its name suggests, the best reason for you to establish your business as an LLC is due to the limited liability it grants you in so doing. The personal assets of you and any partners (called “members”) are protected in the event your business is sued; it defaults on a loan, whether personal or for the business; or suffers other financial or legal trouble. That means your home, personal savings accounts, property and other assets are safe if your business fails or has difficulty.
It’s called limited liability for a reason, though. An LLC does not protect your personal assets in cases where you were willfully negligent, committed a crime, or otherwise engaged in any wrongdoing. Personal assets used as collateral for a business loan would also not be shielded by the LLC status of your company.
If you’re not the sole member of your LLC, members are free to distribute profits as they see fit. When writing the operating agreement for your LLC, members can decide who receives what percentage of profits. This is a great way to compensate a member who invested more of his or her personal finances into starting the business, or to properly compensate the member responsible for most of the general day-to-day activities. Besides the rules agreed upon when writing your operating agreement, there are no regulations for how each member is compensated. Raising Capital Your business might require some initial capital to begin operating. While you may always use personal assets to guarantee a loan (which would leave those assets exposed in the event of a default), an LLC offers more opportunity to raise startup capital. Some banks may even require you to form some sort of company status in order to consider providing a business loan.
Pooling together resources with other members of your LLC could increase the likelihood of raising capital or of being approved for loans. Forming an LLC can also increase the appeal of your company to investors looking for companies to fund or for a clientele who will feel your business looks “more official.”
LLCs are subject to what’s called “pass-through” taxation. Pass-through taxation means the profits pass through the business and are instead taxed on the LLC members’ personal income taxes. The LLC is not taxed as a separate entity, which makes paying taxes and record-keeping easier and more efficient.
You and your members can decide to instead have the LLC taxed itself. While members would still be responsible for paying income taxes, the LLC would be taxed before any of that money passes through. This is all accomplished without any requirements for specific annual reports or other formalities. Indeed aside from the initial registration forms and your operating agreement, LLCs do not require you to maintain specific records in order to remain in compliance.
You may be able to have your LLC treated as an S-Corp for tax purposes. For more information on doing so, consult the Small Business Administration and an attorney.