As Joe worked on the business plan for his new venture, he knew there several types of companies he could form. He immediately rejected the idea of operating as a sole proprietorship. Joe also did not have any partners or co-owners – yet. Corporations concerned him. However, what he learned about limited liability companies intrigued him, and he wanted to learn more.
Fundamentals of Limited Liability Companies
According to Entrepreneur magazine, a limited liability company is:
“a form of business organization with the liability shield advantages of a corporation and the flexibility and tax pass-through advantages of a partnership.”
In some states, including Florida, professionals may form professional limited liability companies (PLLCs). In PLLCs, the members are licensed professionals who generally remain liable for their actions, but not for the activities of the PLLC. For example, a doctor who belongs to a PLLC might be held responsible for committing malpractice, but not for the PLLC’s questionable accounting practices.
Reasons for Forming an LLC
When you consider the available business entities, limited liability companies offer certain advantages:
- Ease of Formation. You will file less paperwork to start your company than if you formed a corporation.
- Costs. The cost of forming limited liability companies generally is less than forming a corporation. It may be less expensive than forming a partnership.
- Protection. As an owner, your personal property usually is protected from liability for actions taken by the company. However, some assets may become vulnerable if you personally guaranteed debts for your limited liability company.
- Taxation. Corporation owners are taxed twice on their earnings. But limited liability companies are considered pass-through entities. As such, owners pay taxes on their income from the company, but the company does not pay corporate taxes.
Despite the attractions offered by limited liability companies, there are some disadvantages when compared to other business entities.
Sometimes Limited Liability Companies Are Not the Answer
Before forming any company, discuss the pros and cons with your business lawyer. Although they are attractive, LLCs do have a few disadvantages:
- Cost of Formation. It may cost less than forming a corporation. However, the costs typically are higher than operating as a sole proprietorship.
- Raising Capital. Some investors may balk at giving money to a limited liability company.
- Longevity. The company may be dissolved if members die, the structure of the company changes, or if the LLC fails to file annual reports and returns.
- Self-employment Tax. LLC members typically pay a self-employment tax on top of their income tax.
Some disadvantages may not apply to every situation.
Know the Advantages and Disadvantages of Limited Liability Companies Before You Act
Generally, it is better to choose the right business structure before you form your company. Sometimes you can convert to another type of business entity, but you will incur additional costs.
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with business and litigation matters. As always, Our Goal Is to Help You Succeed™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.