You have heard about Limited Liability Companies (LLCs) and you are thinking of starting a business. Should you structure it as an LLC? How do you even decide that? With the help of an experienced New Jersey business lawyer who has been through that same analysis countless times, like the lawyers at Barnes Law Group, LLC.
LLCs are a relatively new and very popular form of business. An LLC is not technically a corporation, and it does not issue stock. LLCs do not have as many formal requirements as C corporations, and they do not limit the number of members, as S corporations do. They do, however, offer the same limitation of personal liability as corporations offer, which accounts for their popularity.
Advantages and Disadvantages of an LLC
Basically, LLCs offer many of the advantages of a corporation while retaining many of the advantages of a partnership. The primary advantage of an LLC is the limitation of personal liability. If the business ends up being liable for enormous sums of money, you will not lose all your personal assets because you are an owner; your personal liability will not go beyond the ownership interest you have in the LLC (assuming that you and your fellow owners have not used the company so egregiously that a court feels compelled to disregard the business structure).
Other advantages include:
- No need to print, record, track and sell stock like a corporation
- Substantial flexibility in ownership shares and responsibilities, number of owners, and other essential internal management matters
- It’s easy to raise capital and take in new owners
The major disadvantage of an LLC, for most people, is the fact that LLC profits and losses are treated very much like partnership profits and losses. Money that you make in profits through an LLC, as well as any salary you receive from the LLC, is treated as income from self-employment, making it subject to self-employment tax.
Compared to sole proprietorships and partnerships, LLCs are also subject to greater regulation. And, although LLCs tend to be less expensive to start than corporations, they are more expensive than partnerships and sole proprietorships.
There is no legal obligation for an LLC to create an operating agreement, but any experienced business lawyer will recommend one. A good LLC operating agreement at the time the company is created can go a long way toward preventing problems later. In particular, a detailed and objective operating agreement provides solid evidence that the business really is separate from the owners’ personal finances, making it less likely that a court will later determine that the LLC was really operating as a proprietorship.
A well drafted operating agreement will also spell out:
- The respective owners’ shares of the company and their respective rights as to profits and losses
- The respective owners’ voting rights on matters important to the business
- When and how the business will conduct meetings
- What happens when one or more of the owners decides to leave the business (who has buyout rights, under what conditions, and so on)
Legal Help in Forming an LLC
LLCs can be created without legal help, but it is usually not wise. If nothing else, the assistance of an experienced New Jersey business attorney can provide a far-sighted and problem solving Operating Agreement that can keep the LLC running smoothly and free of owner dissension for a long time. It’s also easy to overlook simple but crucial requirements. Will your LLC be conducting a business that requires a license or other approvals? The documents that suffice to create the LLC will not satisfy those requirements at all.
The offices of Barnes Law Group, LLC, offers 20 years of legal experience and dedication to understanding what each client needs. We do the right thing, the right way for the right reasons. Call us today and tell us what you need out of your business. We will tell you if an LLC is the right way to go. For your convenience, we have offices located in North Wildwood and Egg Harbor Township.