3 Primary Legal Considerations When Launching a Limited Liability Company

by Jessica Kane

A considerable number of small business across the United States are organized as what are known as limited liability companies, or LLCs.

With this in mind, there are a number of legal considerations to bear in mind when launching a new business venture as an LLC. Indeed, there are three primary legal considerations to bear in mind when organizing and launching an LLC.

Is the LLC the Proper Structure for Your Business

First and foremost, you need to seriously consider whether or not an LLC is in fact the proper structure for your business. The most common legal organizational structures for a small business in the United States are:

· sole proprietorship

· partnership

· limited liability company

· Subchapter S corporation

Establishing an LLC is a preferable course because of some benefits associated with this legal structure. One of the primary benefits of an LLC is that there is not what oftentimes is called double-taxation, something that is associated with a traditional of Subchapter C corporation. What this means is that the tax liability passes through from the business itself to the owner or owners. The owner or owners are responsible to personally tending to any tax liability for profits accrued by an LLC. With a traditional or Subchapter C corporation, there is a tax liability at the corporate or business level and also with the stockholders or owners themselves for any distributions or dividends they receive as a result of their ownership in the enterprise.

An LLC also provides legal protection against a person or entity that might have some type of claim against the business. With an LLC, the owners, or members as they legally are called, bear no personal liability for the action or inaction of the enterprise. Thus, the personal assets or property of an owner of an LLC is protected in the event of a lawsuit or other type of action against the enterprise.

Contrast these benefits with a sole proprietorship. The tax implications of establishing an LLC or a sole proprietorship essentially are the same. The big distinction rests in the realm of liability. With a sole proprietorship, the owner of the business has no protection for his or her personal assets should a lawsuit or some other type of claim arise.

With a Subchapter S corporation, a business owner enjoys both the same type of tax benefits as found with an LLC as well as protection against personal liability for action or inaction associated with the business. A Subchapter S corporation tends to provide a business a bit more flexibility in bringing on new owners than is the case with an LLC.

Having noted that, a Subchapter S corporation necessitates the completion and maintenance of considerably more paperwork than is the case with a sole proprietorship or LLC. The failure to keep up with the associated paperwork may result in a determination that the corporation is something of a sham, a determination which would expose an owner or owners to personal legal liability for the affairs of the enterprise.

In the final analysis, considering the pros and cons of different legal structures for business, an LLC oftentimes is deemed to be the preferable course for a new small business venture. This is a consistent determination made in all jurisdictions in the United States.

The Specific Legalities of Establishing an LLC

From a legal standpoint, establishing an LLC can fairly be called a simple process. The establishment of an LLC requires the creation of what are known as articles of organization. Although similar to articles of incorporation, articles of organization tend to be even simpler and more straightforward.

The basic components of articles of organization for an LLC is the identification of the initial member or members of the entity, also known as the owner or owners. A designation of one of these owners as the one who will manage the enterprise, at least initially, is also included in the document.

The articles of organization designate a person or other entity located in the state of creation who will serve as the agent for service of process. This is the person or entity to whom papers filed in court in a lawsuit are served upon. The agent for service of process must be physically located in the state and must have an actual street address and not merely a post office box.

The articles of organization also include information about where the business is located or operating in the state. A general description of what the business will be doing in the state is also included in the document. This can be something as simple as a statement that the LLC is organized to conduct any business lawfully permitted in in the state.

The actual "paperwork" associated with establishing an LLC actually is something that can be completed online via the a website portal established by the office of the California Secretary of State. In addition, annual reports associated with an LLC can also be filed online.

Tax Implications of Business Organizational Structure

As mentioned previously, the type of legal structure selected for a new venture has a direct implication on tax assessment and liability. Thus, the third primary legal consideration when contemplating the legal structure to be used for a new small business enterprise are the tax consequences of a particular organizational scheme.

The reality is that examining and analyzing the tax consequences of different legal business organizational structures is a complicated endeavor. For that reason, the recommendation nearly always is that those involved in the launch of a new venture seek professional advice when it comes to financial issues, including tax consequences of a particular legal organization.

With these primary legal considerations in mind, and understanding there are others that can come into play when creating a business enterprise, an entrepreneur is strongly encouraged to seek legal advice and assistance when launching a new venture. There are lawyers in practice who focus their work on assisting entrepreneurs in dealing with legalities of a new venture.

Picture credit: Photo by Nastuh Abootalebi on Unsplash

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