Limited liability companies offer several benefits for owners of small businesses. In addition to being easy to form, LLCs do not require much paperwork in your initial filing. A key feature of LLCs is limited liability; the owners (called “members”) will not — in most cases — be personally responsible for the debts of the business. This means your personal assets are protected when your LLC owes money.
LLCs exist in a unique nexus of sole proprietorships, partnerships, and corporations, and take the best advantages of each. The LLC entity is less formal and provides more flexibility than a corporation yet still provides the same liability protection. Additionally, LLCs gain the same tax simplicity afforded to sole proprietorships and partnerships yet have additional legitimacy as a result of being a registered business entity.
After discussing the best states to form an LLC last week, I started to get a lot of questions asking about Delaware LLCs. Specially, people wanted to know if there were significant differences between Delaware LLCs and corporations and which was right for their business.
While looking for some additional information on the subject, I came across this video from IncNow.com that summarizes my thoughts perfectly. Rather than repeat the information, I’ll refer you to this video.
Before you form your new company, educate yourself about the differences between the business entities you could choose. Your choice will have a lasting effect on your business’s finances, legal status, and tax requirements.
For most small, closely held, and family businesses, your choice will come down to an S-Corporation or an LLC. An S-Corp is just a standard corporation that files Form 2553 with the IRS. This election distinguishes S-Corporations from C-Corporations and has an effect on how the corporation is taxed.
Despite what the graphic may imply, uneven ownership in an LLC does not necessarily mean an unfair distribution; there may be a number of reasons LLC members may decide to own an unequal share in the company. For instance, some members may have contributed more capital to the LLC and therefore demand a larger ownership interest, or a member may be a silent partner and wish to contribute only a small amount to the company in exchange for a small share. Regardless of the reason, the LLC ownership structure is flexible enough to allow for any distribution of ownership among the members.
Adding a member to an LLC is straightforward, but there are slightly different considerations when you add a new member to a single-member LLC. You will not need to re-register your LLC with the state, but you may have to file an amended Articles of Organization.
Though not required, you should also amend your Operating Agreement to clarify the relationship you have with your new partner. Due to the flexibility of the LLC structure, your new partner may invest any amount of time or money into the LLC and receive any share of the LLC you two deem agreeable.