A week or so ago, I started the series on understanding legal business structures for small, home-based businesses. We’ve talked about sole proprietorships and partnerships, but another business structure that some business owners consider is called a “Limited Liability Company” or LLC…
This is a fairly new type of business structure that is becoming increasingly popular. One of the reasons for this popularity is that it can function sort of like a partnership, but it allows for limited liability in terms of debts and other “company” responsibilities. An LLC or L.L.C. is formed by state statute or law.
The individuals in a Limited Liability Company are known as “members” and there is not a limit to the number of members your company can have. This is one of the reasons that small partnerships might choose to become a LLC. Unlike a corporation, an LLC does not have to have annual meetings or a board of directors. Membership benefits can be assigned and members can have “pass through taxation” or not be double taxed as both individuals and a corporation. An LLC may or may not have its own federal tax identification number, and may be taxed as a partnership, C Corporation or an S corporation.
Some of the disadvantages of forming an LLC as the legal structure for your business are that some states (Alabama, California, Kentucky, New Jersey, New York, Pennsylvania, Tennessee, and Texas) impose special taxes (a franchise tax, capital values tax or margin tax) on limited liability companies; and it might be tougher for a new, small LLC to raise funds or capital.
If you are considering forming an LLC, you should do your homework and see a legal and financial advisor to make sure you file the correct paperwork and keep your records in a way that can make tax time and management as smooth as possible.