Why do I need an LLC for my business?
Are you forming a business? If so, the question as to what type of business entity is one of the most important initial considerations. Selecting the proper entity is important in planning for the growth and expansion of the business.
An LLC, or limited liability company, is a type of business entity that many business owners choose when starting a new business. A Michigan LLC is very popular for new businesses since it is easy and inexpensive to form and maintain as an ongoing venture, and requires relatively little continuing upkeep and filings with the state. An LLC shares many qualities with corporations (S-Corporations and C-Corporations) but with more flexibility. Although popular, LLC’s are not always the best option for a business venture. First, consider some benefits of an LLC.
From the perspective of the IRS, the LLC is not taxed directly, thus reducing the double taxation present if operating as a C-Corporation. Instead, members of the LLC can determine how they want to be taxed. In an LLC with more than one member, the members may decide to be taxed as a partnership or taxed as a corporation. The single taxation benefit of an LLC is a strong point for many business owners.
A key component of operating as a business entity such as an LLC is the concept of limited liability. This means that the members of the LLC are not personally liable for debts and judgments against the LLC. Rather, the LLC itself is liable for those debts so long as the members operate the LLC properly and legally. Members do have to be careful to follow the law lest a court pierce the corporate veil, meaning that the members become personally liable for the LLC’s debts due to wrongdoing on their part.
While LLC’s are often a good choice for beginning businesses, there are some reasons why an LLC should be avoided.
First, there may be some tax consequences for LLC members that could be avoided if the business operated in a different form, such as a C-Corporation. One area of concern is self-employment taxes, which could result in higher taxable liability to the individual members than the business would have incurred had it operated as a corporation.
Second, there may be business reasons to form as a corporation. Will the business seek investors? Will the business be publicly traded in the future? Who will be involved with the business? Is forming a corporation in a state such as a Delaware or California beneficial due to the nature of the business? Answers to these questions may point to forming a corporation over an LLC. For example, some business owners operating in the technology realm and are seeking investors may need to be a Delaware corporation due to the history of Delaware businesses and Delaware’s knowledgeable business courts.
When forming a business, the proper entity is critical. If you are starting a business, or already have formed a business but aren’t sure you are on the right path, please contact Benjamin Long of Schmidt & Long.