It has become increasingly common in recent years for people to structure their businesses as limited liability companies, also known as LLCs. These types of companies can be good for some businesses, but they are not necessarily the best for everyone. Here are some of the pros and cons of organizing your business as an LLC:
- An LLC can be a “pass-through” company, meaning its profits are taxed as personal income rather than being subject to any kind of corporate income tax. This means it avoids the problem of “double taxation” that many corporations are forced to deal with, where both the corporation and the individual shareholders are separately taxed.
- An LLC protects its owners (known as “members”) from liability, in a manner similar to corporations. This is due to something known as the “charging order,” which requires a creditor to obtain a court order and limits the creditor’s collection of any debts or liabilities related to the LLC to be paid only out of the LLC’s assets, rather than directly impacting the members’ personal finances.
- LLCs are relatively easy to set up and run compared to corporations, requiring less paperwork and having fewer procedural requirements, such as not having to conduct annual meetings. Members of LLC’s are answerable only to each other, while corporate officers are answerable to all shareholders of a corporation, regardless of how many shareholders there are. This can be particularly beneficial for small businesses which may struggle to fulfill the legal requirements of running a corporation.
- An LLC needs a detailed operating agreement to avoid potentially costly disputes among its members and substantial disruption to its operations. Members of small and/or family-run LLC’s have less of a market to sell their membership interests than corporate shareholders do, and significant problems can arise if an operating agreement does not provide clear procedures for transferring membership interests when a member dies, becomes incapacitated, commits misconduct or wishes to sell.
- LLCs may face difficulties expanding their operations, particularly if they intend to expand into overseas markets. In those circumstances, you may need to set up separate foreign subsidiaries, or else restructure your business to better suit the needs of your expanding business.
- The fact that an LLC’s income is considered pass-through may not be to every company’s or every member’s benefit. Ultimately, the decision about how to structure your company will come down to every company’s circumstances, which is why you should contact a lawyer with experience handling business law issues.
The Law Offices of Hunziker, Jones & Sweeney routinely handle business law matters for New Jersey business owners, whether for a small start-up, a mid-sized company, or a large corporation. Whether the matter concerns the drafting of a simple 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.