There are many considerations when starting a business. Of paramount importance is the type of business to form. Utilizing the correct type of entity can save money, afford ownership flexibility, and increase liability protection.
The limited liability company (LLC) is a relatively new entity, with which many are familiar. It is a common choice for startups because of the advantages it offers.
One of the primary benefits (and my personal favorite) is that LLCs are flexible, meaning they can fit your needs based upon the type of business you are conducting. The Operating Agreement (commonly referred to as a "partnership agreement" or "management agreement") is the governing instrument serving to control the LLC. The Operating Agreement binds the LLC owners (called "members") and can be drafted to meet the owner’s needs. It is the pliable nature of the LLC - specifically the Operating Agreement - that allows a skilled attorney to make the LLC fit the needs of the specific business. Examples of important details to be included in an Operating Agreement are raising capital, settling member disputes, or exiting the business.
A LLC can save money over a corporation. Taxed only once, at the ownership level, the LLC owners can avoid paying taxes at the additional corporate level (as is the case with a C corporation). This means that the LLC itself is not taxed in addition to the members.
Furthermore, LLC’s allow the owner to deduct many business expenses from their overall taxable income. These expenses include:
Another important feature of the LLC is the considerable liability protection. The business can effectively operate as a standalone being, irrespective of the individual member/owners. This means that if a lawsuit were to be initiated against the LLC, only the assets of the LLC would be exposed to liability, leaving the individual members and their personal assets shielded from liability. A word of caution: LLC owners can undermine the liability protection afforded; legal advice should be sought on contracts with which the LLC is bound.
At Providence Law we celebrate startups. We provide counsel on the many different startup considerations and assist with virtually all of your business needs. From business formation to business contracts, We are Your Small Business Resource.