You may have seen the letters “LLC” next to a company name and wondered what it meant. Or perhaps you have heard of LLCs before, but wondered what the point of them was, or what made them different from corporations. Fortunately, LLCs aren’t too hard to understand as an idea, and forming your own LLC can have many advantages, depending on your individual circumstances.
“LLC” is an acronym for a “limited liability company,” a kind of unincorporated entity that exists to protect the company’s owners from personal liability without all the formalities of a corporation. In other words, if your company goes into debt or gets sued, the LLC will in ordinary circumstances protect you from being personally responsible for paying such debts or judgments. Aside from protecting your bank account and your personal property, the most obvious benefit this provides is that, if your company goes under, you won’t need to fear long-term personal indebtedness or bankruptcy as a result of the LLC shutting down.
There are other benefits to LLCs as well. For example, LLCs are considered “pass-through” entities for the purposes of taxation; in other words, the income made by the LLC “passes through” to its owners, so you only need to pay personal income taxes on the money it makes. Compare this to the standard “C-Corporation,” which must first file separate tax returns and pay corporate income taxes before the money can be passed down to its owners. (There is a kind of corporation known as an “S-Corporation,” which is also considered a pass-through entity, and thus doesn’t suffer this same problem of “double taxation.”)
Additionally, it is relatively simple to set up an LLC, and it has comparatively few structural requirements compared to a corporation. Unlike corporations, LLCs don’t need to hold shareholder or board meetings, and they don’t need to designate executives or directors. LLC’s do not require agreement on the equivalent of a corporate resolution for major decisions. This makes LLCs particularly well-suited for small businesses that are just starting out, which don’t immediately have complicated finances or operations.
However, there are downsides to LLCs. Even one owner leaving the LLC can cause major problems if you don’t have a pre-existing operating agreement dictating how membership interests can be sold or transferred and dissolving an LLC can be onerous unless the operating agreement includes specific dissolution procedures. Additionally, LLCs aren’t always recognized outside of the United States, meaning that doing any kind of international business using an LLC can be difficult, if not impossible depending on which country you want to do business in. Finally, there can be additional tax and finance implications related to LLCs that may develop as your company grows and changes.
If you are interested in starting an LLC, or are looking into reorganizing your business, you may contact the business law attorneys at Hunziker, Jones and Sweeney. The Law Offices of Hunziker, Jones & Sweeney handle these matters for New Jersey business owners routinely, whether for a small start-up, a mid-sized company, or a large corporation. If the matter concerns the drafting of a simple operating agreement, or instead involves a more complex transaction involving multiple parties or facets, the firm can assist. Contact the firm for a consultation at (973) 256-0456 or fill out our contact form for a consultation.