If you are forming a business, there are many options as to how to proceed. Your choices will depend on the nature of your business, the number of partners, the financing, and how much liability protection you need. Sometimes a simple partnership is adequate, but in other cases a distinct legal entity known as a limited liability company (LLC) is your best choice.
In all cases, it’s important to consult with an experienced business attorney to help you decide what is best for you. But if you are considering an LLC, there are some common advantages and disadvantages to help steer you in the right direction.
An LLC is a distinct legal entity from its owners, and as such it offers a number of protections. Together, these can offer many advantages for many business owners, including:
- You and your partners’ personal assets are protected should your business incur debt or become the subject of a lawsuit;
- An LLC is flexible in that you can elect between partnership and corporate tax status; and
- Fewer corporate formalities.
For these reasons, many entrepreneurs decide that an LLC is the best way to organize their new company.
There are also disadvantages (or at least, areas of particular concern) to an LLC, so it is important to think through all of the factors that may influence your decision, for example:
- There are state filing fees associated with an LLC that you will not encounter with a sole proprietorship or general partnership;
- The liability protection is not absolute, and members’ personal assets can be threatened – for example, in cases of fraud or negligent supervision of employees; and
- Leadership roles will need to be carefully defined in the LLC agreement. Confusion about who is in charge can cause disputes among partners and investors alike. It is especially critical that the operating agreement be carefully drafted with consideration of the exact responsibilities of each partner.
Consultation is the key
In all cases, an LLC requires consultation with an attorney experienced in business formation before proceeding. It requires a solid understanding of your goals, your investors, and the applicable laws to make the right choice for your start-up.
Ultimately, the various advantages and disadvantages should point you to a clear understanding of what is best for your new business. The few relative disadvantages of an LLC are often well covered by carefully planning at the time of formation.