LAWYER MARK BRIGGS DISCUSSES WHETHER FORMING YOUR STARTUP BUSINESS AS AN LLC IS THE RIGHT MOVE

In a recent post, lawyer Mark Briggs provided some brief descriptions of the four most common legal structures for a business—corporations, sole proprietorships, partnerships, and limited liability companies—as well as some of the advantages and drawbacks to each. In this week’s post, he goes into more detail about the most popular type of business entity used by startups today: the limited liability company (or LLC).

An LLC is basically a hybrid between a partnership and a corporation. Their rise in popularity has been almost meteoric—as recently as three decades ago, LLCs were relatively uncommon and exotic. Now, most startups are formed as LLCs, and it’s no wonder, as they offer new business owners a sort of a best-of-both-worlds situation: the flexibility of a partnership, coupled with the liability shield and investor familiarity of a corporation.

When it comes to taxes, LLCs are quite flexible because they can be taxed as a partnership, corporation, or as a sole proprietorship. LLCs with only one member can be treated as a sole proprietorship, which is a “disregarded entity” on the owner’s personal income tax return. This is attractive because it reduces paperwork and tax return preparation costs. LLCs with two or more members are, by default, classified as partnerships for federal income tax purposes, and file tax returns but pass through any income or losses to their members. You can also choose to have your LLC taxed as a corporation, which has certain tax advantages for the right situations.

Although a majority of startups should probably be formed as LLCs, it’s not the right structure for all. Like partnerships, LLCs can be more expensive to form than sole proprietorships or corporations, as LLCs need an extensive operating agreement if they have more than one owner/member. Also, there are a few types of businesses that cannot be formed as an LLC—state law ultimately determines the specific requirements for forming an LLC, so check with your lawyer and accountant before making any final decisions about whether an LLC is right for your startup.

So there you have it! Do you own an LLC? Have any tips? Feel free to share them in the comment section.

Photo Credit: Mark Crossfield