By Janet Monroe, Attorney
Brannon Robinson PC

When launching a new business, you may want to consider the formation of a limited liability company.  Among other advantages, an LLC offers flexibility, can prove less costly to maintain, and provides the combined benefits of limited liability protection of a business entity, along with flow-thru taxation of a partnership.

Limited-Liability Protection

As opposed to operating as a sole proprietor or in a general partnership, setting up your start-up as a separate business entity such as a C-corporation, S-corp or LLC, gives you (and each of your business partners) a layer of protection against personal liability.

The process of forming either a corporation or LLC is relatively similar.  Generally, there are five steps to create a new start-up LLC:

1. File the Articles of Organization with the Secretary of State
2. Register the entity with the Internal Revenue Service to obtain an Employer Identification Number (EIN)
3. Open a business bank account (take your approved Articles and EIN with you)
4. Formalize the terms between you and your business partners with a written Operating Agreement
5. Affirm the formation of the entity in writing with formal Resolutions

Once you have accomplished all of the above,  your start-up is ready for the ribbon cutting ceremony and to begin its business operations.

Please note, however, that your limited liability protection is not absolute.  You must maintain your business affairs separately from your personal finances and assets.  Be sure to open up your business banking account with a deposit of your start-up capital investment.  Be careful not to commingle your personal assets with your business assets or you  run the risk of losing the limited liability protection of the entity – commonly known as “piercing the corporate/LLC veil.”

Low-Maintenance

Limited liability companies are for the most part low-maintenance on the record-keeping end of things.  Once you have your formation documents, you should keep them organized in an official Minute Book.  Should you make any changes to the terms, make sure to document them in writing.

This is where you may begin to see your cost savings.  In comparison to corporations, your needs for ongoing legal documentation will likely be minimal because the regulations for maintaining a limited liability company are much less rigid.  Corporate formalities such as holding annual meetings, keeping detailed records of those meetings and any major business decisions require ongoing legal documentation in order to properly maintain your company’s Minute Book.

These formalities are not required for LLCs, and thus lower ongoing legal fees as well as make it much more difficult to “pierce the veil” of an LLC by not having to keep up with formal corporate-type requirements.

Flexibility

Perhaps the most important benefit of a limited liability company is the flexibility that it allows in choosing accounting methods, your management structure, and allocating profit-sharing amongst its members.  State statutes leave such provisions up to the members of the LLC by allowing such terms to be defined within its operating agreement.

Flow-Through Taxation

Finally, with an LLC, income is not taxed at the entity level, rather it “flows through” to the business partners of the company and income and expenses are reported on the individual’s tax returns either as a sole proprietor or as a partnership.  You’ll want to speak with an accountant in detail about this, because the ability to claim the initial years of start-up losses on your individual tax returns, for instance, could prove to be quite beneficial to you.

Additionally, you can elect for your LLC to be taxed as a C-corporation or S-corporation. Combining an LLC entity with the self-employment tax benefits of an S-corporation election is an ideal single member LLC, especially when the business is involved in the business of real estate.

If you are thinking about setting up a start-up, you should keep limited liability companies in mind.  Seek advice from both an attorney and an accountant before you decide which entity type would be best for your particular needs.

This blog is provided for informational purposes only.  All information contained should not be considered legal advice, nor should you take action upon this information without first seeking professional counsel. If you decide to comment or contact an attorney by any means of communication, do not disclose information you regard as confidential.  Unless otherwise agreed in advance, all unsolicited inquiries or information received by Brannon Robinson PC will not be regarded as confidential. and no attorney/client relationship is formed by means of Internet or digital communication.