The difference between LLC and other company types

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If you’re thinking about starting a business, you have a list of things that you need to complete. Of course, you have the helping hand of a solid business plan that’ll keep you grounded and on track. But there are a couple things that you’re going to have to decide on in order to even register your business. The entity your business will fall under is a huge and important decision that you need to make. The reason why is that each type of entity follows different rules and state regulations as well as taxes. This is why it’s so important to decide the right entity to suit your needs. Maybe you’re thinking about registering a limited company as your business.

But, let’s get the basics covered first. What is an LLC? An LLC (limited liability company) is basically a combination between a partnership and a corporation. If your business is an LLC, you usually have more operational flexibility while the income factor is similar to a partnership but with limited liability. Though it may sound very similar to a limited partnership, there are legal differences.  This business structure is very popular among companies, specifically startups. Though this is just a basic introduction to LLC entities, if you really want to dig in deeper, you’re going to need to see a lawyer who’s well versed in this.

More importantly. LLC rules and regulations differ from state to state, so though you don’t need a lawyer to form an LLC, going to one in order to gather state-specific information is probably your safest best. This is simply to protect you and give you more knowledge about your limitations and freedoms when creating an LLC. For example, the state of Nevada does not require the creator of an LLC to have personal or corporate income. Therefore, it’s extremely easy to create an LLC in Nevada. Meanwhile, Delaware is one of the friendliest-LLC states in the United States with over 64% of Fortune 500 companies registered there.  While there are other states which aren’t as LLC-friendly, having more limitations than the states listed above.

So, it’s clear that many companies benefit from setting up their businesses as LLC entities. As an LLC, you’re able to decide how you want your LLC to be taxed, who obtains management rights and how the profits are distributed to the owners. Thus, for startups and small businesses, many opt for being an LLC as they’re generally given more freedoms with how they wish to run their business. However, like anything, there are disadvantages to being an LLC. For example, if your LLC business has only one member, which is yourself, then as Jennifer Reuting states, the author of Limited Liability Companies for Dummies, the company is then “automatically treated as a proprietorship for tax purposes.” Of course, there are ways to work around this, such as giving a certain percentage of shares to a friend which will make it a partnership. However, you will not be able to give shares to your spouse.

In addition, though you may think the LLC structure is ideal for any business, it’s not. Though it does suit many business structures, there are some that don’t mesh well with its structure. If your business is financed by venture capital firms, then you do not want your business to be an LLC entity. Why? Because of the tax restrictions that are attached to VC funds like endowments or pensions.

However, if you’re certain that an LLC entity is the right choice for your business, it’s quite an easy process to establish your business as an LLC. Of course, you need to decide on a name for your company and then look at how you’re going to run your business. LLC companies can be structured as a ‘member-managed’ or ‘manager-managed’ business. Naturally, depending on which one you decide on, you’re then going to have to fill out the necessary paperwork and, to be safe, have a lawyer review the documents. Then, lastly, your LLC needs an operating agreement. This is possibly the most complex step in forming an LLC as it’s essentially the foundation for your business. With the operating agreement, it’s always best to sit down with an experienced lawyer that’ll be able to guide you through this.

Having your business as an LLC entity isn’t a bad idea, but what’s important is that your business benefits from the LLC structure. Make sure that you do your research and refrain from making any hasty decisions. Though you’re going to be making a lot of important business decisions, this one is crucial as it’ll be the foundation for your business. At the end of the day, any entity can work in your favor as long as you choose the right one for you.

This article was contributed by the Columbia community. To contact the contributors of this article, please email us.

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