I have heard from many people that they do not have any entity formed for their business and operate as a sole proprietor. If operating as a sole proprietor is best for what you do, and your business has very limited liability for the owner, it might not be a bad move. However, there is another entity in the business world that does not add much of a burden on you or the business, can protect the owner’s assets from liabilities, and can have some tax benefits that can only help further your business. That is be the Limited Liability Company (“LLC”).
Initially, just the name “Limited Liability Company” shows off one of its key benefits, limited liability for the owner, assuming everything is handled properly. LLC’s have the protections of a corporation, without some of the formalities that I will discuss below, in protecting the owner’s personal assets from obligations/liabilities of the LLC. For example, if your business gets sued by a customer, the “corporate veil” of the LLC can protect the owner’s personal assets from being attached to any judgment that may come against the LLC. There are various ways that someone can “pierce the corporate veil” and gain access to the owner’s personal assets, but usually that is only when the owner is not operating the LLC as it should be, or when the owner is substantially at fault individually for any injuries.
Operating an LLC is about as easy as it can get, aside from operating as a sole proprietor, in the entity selection world. While LLC’s have many of the same protections of a corporation, they have none of the corporate formalities. By corporate formalities, I mean the requirement of a corporation to have shareholders meetings and board of director’s meetings; keep minutes, and accurate books and records; and maintain share/stock certificates and stock ledgers, to name a few. Many corporations, especially those on the larger side, have someone in-house to handle these formalities, but, many LLCs, are not the size of a large corporation, and operating the LLC is easier since formalities are not required. Additionally, forming an LLC is relatively easy, and can be done at a low cost by the firm. Pennsylvania does not even require an LLC to have and file an operating agreement with the state, but we would always recommend that a multi-member LLC, or a single-member LLC that admits new members, have an operating agreement drafted by an attorney with expertise in the area.
As to the tax benefits of an LLC, I first want to say there are many ways to set-up your LLC for tax purposes depending on each business’s situation. I suggest you reach out to someone with expertise in this area to get things properly organized for your benefit. There are several tax benefits of using an LLC. Initially, all income is “passed through” to the owner of the LLC and reported on the owner’s personal income tax filings. This could qualify the income for a lower tax bracket, depending on the income of the owner, versus the tax bracket for the same income for a corporation. Additionally, an LLC can avoid “double taxation,” which is the taxation of corporate profits and then the taxation of the income that the corporation owner receives as a dividend. As I said above, the LLC income is simply passed through to the owner and taxed only once.
These are some of the many benefits of operating an LLC instead of a sole proprietorship or many other business entities. If an LLC sounds like the entity for your business, or future business, feel free to reach out to me, or any of the attorneys in the firm’s Business Law Group, and we will be happy to assist you and get you set-up properly.
This blog post is Part 1 of a two-part series on LLC’s. Look out for Part 2 of the series, which will cover important specifics for LLC formation and considerations for many elements that may get skipped in the formation process.
If you have any questions about this post or any other related matters, please email the Business Law Practice Group Co-Chairs, David Blatteis at firstname.lastname@example.org, Dolores Laputka at email@example.com, or Graham Simmons at firstname.lastname@example.org.