Pros and Cons of Forming an LLC



The Limited Liability Company, or LLC, is one of the most common choices for business entities among newly formed businesses.  An LLC is an entity having one or more members that is organized under the Beverly-Killea Limited Liability Company Act. The Act is designed to assist in the formation and operation of small, closely-held or operated business arrangements.

 

The LLC offers protection of personal assets, significant flexibility in the management, ownership and operation of the company, pass-through tax liability. The individuals with an ownership interest in an LLC are referred to as members, with one or more members being designated as the managing member.  The biggest drawback for many small companies is the $800 annual franchise tax for maintaining an LLC.  However, the benefits conferred by the LLC structure far outweigh this cost which, is minimal if the company becomes profitable.

 

While the formation costs can be limited to $800, as it is not required that an LLC prepare and sign an operating agreement, it is strongly advised that you do execute an operating agreement.  I have litigated many cases that involved a business relationship gone bad, most of which could have been avoided if the parties had actually sat down and put on paper the terms of their agreement.  In many cases, this simple act can reveal that the owners were not actually on the same page regarding some material terms, giving them an opportunity to work it out before the company becomes profitable and there was a pot of money to fight over.

 

An LLC generally does not enjoy perpetual existence as it must dissolve on the death, bankruptcy, retirement, resignation, expulsion, or dissolution of any member who is a manager (in an LLC managed by one or more member-managers) or any member (in an LLC managed by its members or by one or more nonmember-managers).  As such, the lack of continuity of existence is sometimes a factor that causes new business owners to form instead as a corporation.

 

*This article is for informational purposes only.  It is not guaranteed to be a complete or thorough analysis of the issues discussed herein. It in no way shall serve to create an attorney-client relationship. The reader is advised to check for changes to current law and to consult with a qualified attorney on any legal issue.

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