Beginning a company requires those involved with the business to decide what type of business structure to choose. One of the most popular business structures in today’s professional world is the limited liability company (LLC). Understanding the legal implications of choosing this structure gives insight as to why it is such a popular choice for new companies.
Protection From Liability
Some small businesses choose to be a sole proprietorship or a partnership, but these business structures can leave the owners of the business open to substantial personal liability. For example, a partner in a partnership may lose personal property if the business is forced to declare bankruptcy. Lawsuits related to the business could also put owners’ personal belongings and financial assets in jeopardy.
As the name implies, a limited liability company allows the owners of the business to limit any liability associated with the business to avoid personal liability. Members of the LLC are only liable for the amount that they have contributed to the company, so there is no fear that a lawsuit or business debts will leave members struggling to hold on to personal property.
It is important for the business to present the fact that it is a limited liability company when dealing with other businesses, financial institutions, vendors and clients. This lets others know that the personal assets of the members are not to be viewed as collateral for any financial agreements.
Tax issues related to limited liability companies tend to be complex because there is no set tax regulation related to these types of companies. The company will have to decide whether to be taxed as a partnership or a corporation. Profits may end up being taxed twice if the profits of the corporation are taxed and the income received from the company by a member is taxed again. Because of the complexity of taxation of limited liability companies, LLCs are urged to seek the assistance of an accountant to avoid underpayment of taxes.
Maintaining Multiple Locations
Opening a business in Chicago as an LLC will have a certain set of regulations and tax implications that may not be applicable if the company decides to expand to a city outside of Illinois. Because this business structure is so new, states tend to have their own set of rules about how the company should be run and how these companies are taxed.
Any company that decides to choose this business structure and later expands to another state will need to seek the assistance of a legal professional in order to ensure that all locations comply with state law.
Forming a Limited Liability Company
The paperwork involved with forming a limited liability company makes it best for a lawyer to advise the company during the process. The business will need to file articles of organization and draft an operating agreement prior to beginning operations. This paperwork and all fees associated with filing can be reviewed with a lawyer.