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Forming an LLC
Because of the separate legal status granted to an LLC, there is an extensive amount of legal paperwork that must be generated and filed. In addition, many states vary the level of liability protection that they extend to LLCs. This is due to the relatively recent creation of the LLC organizational business structure and the lack of court cases tried and found to uphold the liability protection afforded to LLCs. Another characteristic of an LLC that can be a disadvantage is the varying titles the principals use, including manager, member, managing member, managing director, president, chief executive officer, and partner. From a contractual perspective, this often makes it difficult to determine who actually has the authority to enter into a contract on the LLC’s behalf. LLC are required to pay a state LLC capital value or franchise tax in many states, including Texas, Tennessee, Pennsylvania, New York, New Jersey, Kentucky, California, and Alabama. Essentially, this privilege tax is a “fee” the LLC pays to the state for the limited liability benefits it receives. Furthermore, it may be more difficult for an LLC to raise financial capital since investors are often more confidant when contributing capital to a company governed by the more familiar corporate model. Finally, there is no guarantee of perpetuity in the standard formation of an LLC. These details must be specified in the LLC’s Operational Agreement
Recommendations for a Limited Liability Company
Because of the liability protection benefits and lack of burdensome corporate formalities, LLCs have become an increasingly more popular business form for smaller businesses. They are a favorable choice for small companies with several owners who do not have plans to increase the size of the business significantly or raise large amounts of capital.
Formation of a Limited Liability Company
Companies Incorporated provides personal assistance for each of our clients throughout the entire process of forming an LLC. Once the appropriate LLC documents are filed with the various state agencies, the next step is the creation and adoption of an Operating Agreement that will govern your LLC. A comprehensive LLC Operating Agreement is included with each formation package purchased through Companies Incorporated. This document is not typically recorded or filed with any state or federal agency; however, it is recommended as a best practice/due diligence obligation of any well-organized LLC. Essentially, the Operating Agreement is a legal contract that dictates the management type, ownership and interest of the members, distribution of power, and many other operational and organizational details. Whereas some LLCs are managed by their members, others choose to assign managers to the LLC. When managers are assigned to run an LLC, their responsibilities should be explicitly detailed in the Operating Agreement. Other important business details that should be thoroughly detailed in the Operating Agreement are the members’ voting rights, assignment of ownership interest, profit distribution, etc.
Disadvantages of a Limited Liability Company
- Extensive legal documentation required
- Liability protection varies from state to state
- Varying titles for principals
- Many states levy additional LLC taxes
- Difficult to raise financial capital
- No guarantee of perpetuity