So you’ve decided to start your new business. Now what? Making the decision to start a new business is just the beginning of the process; choosing the proper company structure is a vital component of protecting yourself and your new business from any future liability. One of the most popular business structures is a LLC, or a limited liability company. While not always the right choice for you, an LLC can provide certain benefits to business owners, as detailed below.
The LLC is a form of business organization that combines elements of corporations and partnerships. It is designed to provide the advantages of limited liability, favorable taxation, and reduced legal formalities. LLCs are created by state law, which differs from state-to-state.
The number one reason most people choose to organize their business as an LLC is the limited liability it provides members, or those people who own shares of the company. Unlike partners or sole proprietors, members are liable for the debts of the LLC only up to the amount that they contributed to it. In general, the personal assets of members cannot be reached by the LLC's creditors—there are, however, special exceptions to this rule, which your attorney can detail for you.
An LLC also provides flexible taxation, as they are known as “pass-through” taxation entities by the IRS, meaning that, generally the IRS taxes the members of the LLC rather than the LLC itself (LLC’s can be taxed as either an S Corp or a C Corp). Pass-through taxation avoids the double taxation of dividends that many corporations face. One-member LLCs are disregarded by the IRS, and LLC income is attributed to the member as his individual income. Other LLCs are treated as partnerships, and LLC income is allocated to members in proportion to their right to receive profits from the LLC. If you have questions regarding how your LLC will be taxed, consult either your attorney or accountant for more information.
An LLC can be formed quickly and easily—all that is required is filing of Articles of Organization with the Kentucky Secretary of State, and paying a filing fee, along with a yearly report and renewal fee. It is highly recommended that members of an LLC enter into an operating agreement, in order to resolve any future disputes among members.
While an LLC is not the right choice for every business owner, it does provide benefits for those who are seeking limited liability, flexible taxation, and more relaxed paperwork. For more information, talk to your attorney about how to form an LLC, or any more questions you may have regarding the right business structure for your specific needs.