Limited Liability Companies
Limited liability companies (LLCs) are a business structure used for private companies. In most situations, an LLC is formed where two or more business individuals establish a partnership. The involved individuals thereby run the business as co-owners, with an LLC offering the same limited liability as corporations but easier to run and more cost-effective.
Benefits of an LLC
LLCs offer flexibility in terms of the choice of tax treatment and even management structures. Owners of an LLC can choose to adopt either of the tax regimes of sole proprietorships, partnerships, or corporations (Corporate Finance Institute, 2021). Meanwhile, management structures are not required to appoint officers or a board of directors, unlike corporations.
Perhaps the largest benefit that comes with operating an LLC is the liability protection status. This ordinarily means that the company exists or stands as a legal entity. Thus, the liability protection is explained as when there is a loss or an incident in your business; it does not result in the exposure of personal assets and finances (Cenkus, 2021). These are not at risk, thereby shielding you from certain personal liability risks. However, there are some exceptions regarding liability protection, as is always the case in law (Cenkus, 2021).
Finally, LLCs have the benefit of pass-through or flow-through taxation. The income generated from a flow-through entity is treated as an income to the owners (Cenkus, 2021). Therefore, for an LLC, the income is solely taxed at the individual owner level rather than the company level. This eliminates the chances of being double taxed, unlike in C Corporations.
Use of an LLC Operating Agreement
LLCs draft a document that outlines the business financial and functional decisions that generally include the rules and regulations, commonly referred to as the LLC operating agreement. It is used to govern and control the internal business operations in a manner acceptable to the owners and suits their specific needs. In other words, it is the official contract binding the owners to the stated terms. The necessity for the operating agreement is to protect the business’ limited liability status, clarify verbal contracts, and protect your agreement before the states’ rules (Nwatu, 2016). Finally, LLC operating agreements entail tax considerations, member investments, management structures, sharing of profits, and the number of members (Nwatu, 2016).
Conclusion
LLCs are therefore a good business structure that proves to be protective of the individual owners. This business structure is consequently prudent for business start-ups, and the above-stated benefits should make this an enticing option for Lee. It will protect Lee individually as well as the firm on matters of copyright, legal entity, and protection status. Therefore, I firmly recommend Lee to consider applying for an LLC.
References
Cenkus, B. (2021). Does forming an LLC or corporation fully protect you from liability? Cenkus Law. https://cenkuslaw.com/llc-corporation-liability-protection/
Corporate Finance Institute. (2021). Limited liability company. https://corporatefinanceinstitute.com/resources/knowledge/strategy/limited-liability-company-llc/
Nwatu, I.S. (2016) Basic information about operating agreements. United States Small Business Administration. https://www.sba.gov/blog/basic-information-about-operating-agreement
