Happy New Year Lionesses! Are you ready to roar? Ready to roar into 2016 by legally setting-up your emerging, new, or existing business? Before legally forming your business structure, it is important to understand the advantages and disadvantages. There are three major business structures, I like to refer to as Sophisticated Business Structures (SBS), that should be taken into consideration when choosing to legally form a business: Limited Liability Company, Subchapter S-Corporation and Corporations. The first Sophisticated Business Structure up for discussion for the New Year is the Limited Liability Company.
A Limited Liability Company (LLC) is a business formation structure that is relatively new to the United States, as it was introduced only in 1977. However, LLCs have become one of the more popular business structures among small business owners. Its popularity is primarily due to its ease of formation, limited liability protection, and pass-thru taxation.
First, LLCs can be formed by completing and filing Articles of Organization with the state authority, generally the secretary of state. The Articles of Organization will identify details about the legal entity such as the name of the LLC, the named registered agent, the members (owners), the management structure, and the named organizer. Once the documents are filed and the related fees are paid, the LLC is legally formed and recognized; this process usually takes up to 2-3 business days. The filing fees could range from as low as $100 to as high as $315, fees vary per state. The fees associated with this sophisticated business structure could be considered a huge cash outflow for the “just-starting off” sophisticated entrepreneur. However, remember two important points:
- Forming an LLC may help increase your credibility with new clients, customers, vendors, or even partners.
- Generally speaking, the fees are considered deductible business expenses, meaning they can be written off.
LLCs are attractive to most entrepreneurs because this type of business structure offers the same limited liability protection as Corporations without the extra forms, procedures, and fees associated with actually forming a Corporation. So what is limited liability protection exactly? Imagine 2 islands. The first island contains all your personal assets (cash, house, retirement accounts). The second island contains all the assets of the LLC. If for some reason, a person or company feels they have suffered a loss, the 3rd party is only able to pursue the assets on the island for the LLC. They are not able to swim or boat across the water to the first island, containing your personal assets, to recover from their alleged loss. Your personal assets are not left exposed or vulnerable with a LLC.
Conversely, if the member(s) or owner(s) of a LLC do not act responsible and mismanage the LLC, the assets of the owners/members may become exposed. Disregarding established formalities, comingling business & personal funds, as well as engaging in fraudulent activity are a few examples of way to mismanage the LLC or any sophisticated business structure for that matter. If it is determined that mismanagement or “piercing the corporate veil” has occurred, 3rd parties may aggressively pursue not only the business assets but the assets of the business’s owners as well.
Lastly, LLCs offer pass-through taxation. In other words, sophisticated female entrepreneurs can choose to have all their business income and loss “pass-through” to their personal income tax return. The LLC is not subject to a separate entity tax. In other words, the LLC does not pay taxes. Again, all gains, losses, income, credits and deductions flow through to the individual member(s). With an LLC, the member(s) do have the option to elect to be taxed as a Subchapter S-Corporation, if it is determined a more advantageous federal tax position. Consult a trusted tax advisor before making elections.
Please consult with a trusted tax advisor or CPA to gain a deeper understanding of Sophisticated Business Structures (Limited Liability Company, Subchapter S-Corporation and Corporations) before legally forming your business. If you do not have a CPA, please don’t hesitate to connect with me. I love small business owners and I am excited to help.
Hope your business blings in the year 2016!