LLCs Are An Increasingly Popular Business Entity Choice

• August 18, 2016
• Business Law

Each year, many people in Maryland decide to go into business for themselves. Entrepreneur magazine has noted that, of the myriad of choices you have to make when starting a business, one of the most important is the type of legal structure you select for your company. This decision will have a direct impact on how much you pay in taxes, the amount of business-related paperwork you have to prepare, and the personal liability you could face if the business goes south.

In Maryland and elsewhere, limited liability companies have become an increasingly popular business entity structure in recent years. Undoubtedly, this is because the LLC is perceived as offering certain distinctive advantages over other types of business structures.

The Nerdwallet website lists several advantages offered by an LLC. First, an LLC offers the limited liability protection of a corporation. Unless LLC members sign a personal guaranty, creditors could only go after a defaulting company’s assets rather than LLC member’s personal assets. Second, an LLC offers the favorable tax advantages of a partnership. Thanks to LLC’s pass-through taxation, only the LLC members are taxed on business earnings rather the company itself. As a result, members avoid being taxed on profits both as individuals and as a company.

Third, an LLC offers the organizational flexibility of a partnership without the rigid formalities necessary to maintain a corporate existence. By way of illustration, LLCs have no board of directors nor do they hold annual shareholders meetings. LLC members are free to create whatever management structure they desire and determine among themselves how to allocate profits and losses. Startup and maintenance costs for an LLC are typically lower than for an incorporated business.

There are times, according to Inc. magazine, when having a corporation will be more beneficial than having an LLC. For example, since a corporation has the power to issue stock certificates to its owners, the corporate form might be ideal if you desire to bring in outside investors or if you want to hold out the possibility to loyal employees of being rewarded with stock options.

Similarly, it might make sense to set up a corporation instead of an LLC if you envision an initial public offering sometime down the road. If you originally set up an LLC, you would need to switch your company from that to a corporation before the IPO. This would unnecessarily increase the ultimate costs of the IPO.

Operating agreement

The U.S. Small Business Administration observes that a well-written operating agreement is deemed to be vital for multi-member LLCs since it sets forth the rules and regulations which will govern the running of the LLC. Operating agreements typically set forth the percentage of members’ ownership interests together with the powers and duties of managing members. The agreement also addresses when meetings are to be held and what members voting rights are. Perhaps the most important aspect of an operating agreement is to set forth how profits and losses are to be allocated among members.

A well-crafted operating agreement will try to anticipate and address potential problems that could arise among the members. The SBA advises that an operating agreement should contain any verbal agreements among LLC members relevant to the LLC’s management since they could head-off future disputes.

Seek legal assistance

Those interested in forming an LLC should contact a Maryland attorney experienced in handling business formations as soon as possible, such as a Fredrick, Maryland business law attorney. The attorney can craft an operating agreement aimed at protecting each LLC member’s financial interests.