As a startup, forming your business as an LLC is a convenient way to protect your personal assets. We take a look at well-known giants that make use of the LLC structure and what you should know before going this route.
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What is an LLC?
LLC stands for Limited Liability Company. This legal business structure combines the tax advantages of a partnership with the liability protection of a corporation. Forming an LLC in the U.S. is one of the most convenient structures for startups: it is quick and easy to form and owners are not personally liable for the company’s debts or liabilities. However, the regulations surrounding LLCs vary from state to state, so it’s best to check this.
How do I know an LLC is the right fit?
The best and often easiest way is to consider the pros and cons. Here we list them:
Why an LLC?
- Protects your personal assets like your home, vehicle, and bank account in the event of the business’ bankruptcy. LLCs are responsible for their own debts and obligations; your only personal risk is the capital you invested into the business.
- Prevents pass-through taxation, which means owners (called members) do not have to file a corporate tax return. Instead, they report their share of profit and loss on their individual tax returns. This differs from corporate taxation, in which the profits are taxed at both the corporate level and on the owners’ tax returns.
- The simple business structure makes it generally less complicated and easier to form than corporations, has less paperwork, expenses, and formal requirements. For example, whereas a corporation requires regular shareholders’ meetings and keeping of minutes etc., a limited liability company does not have to observe such formalities.
- Management/owner flexibility: The “owners” of an LLC are called “members”, while the persons who are managing the company are called “managers”. An LLC can opt to be managed by:
- its members (member-managed), which allow all owners to share in the business’ daily decision-making, or by
- managers, who can either be members or outsiders (manager-managed). The latter is useful if you need to hire people who are experienced in running a business.
Read more about the differences between member-managed and manager-managed LLCs — and which one might be best for you.
- Increased Credibility: An LLC is recognized as a more formal business structure and can help your business appear professional than if it were a sole proprietorship (single-owned business) or partnership (a business association of two or more people). In addition, customers and investors may feel more comfortable doing business with you if they see your company registered as an LLC. In addition, banks tend to be more willing to do business with LLCs than with sole proprietorships or partnerships, which can increase your access to business loans and other lines of credit.
Like most things, there are advantages and disadvantages. Before registering your business as an LLC, consider these possible drawbacks.
Why not an LLC?
- Raising capital is challenging. Although LLCs offer investors limited liability, investors are often more comfortable investing in corporations who can offer shares or stock certificates, something which LLCs do not have.
- LLCs pay higher filing fees compared to other business entities like sole proprietorships and partnerships. In addition, some states require LLCs to pay yearly renewal fees.
- Owners’ income tax. If an LLC is taxed as a pass-through entity, owners must pay income tax on the company’s profits even if they don’t receive a personal payout.
- Less incentives. LLCs cannot offer fringe benefits like health and insurance to employees or even yourself. And since there is no stock, you cannot use stock options as incentives for your employees.
What are some prime examples of companies using the LLC structure?
Amazon.com started as an online bookstore with a garage as its head office. Fast-forward 25 years, they now deliver everything imaginable, from food to clothes to electronics. But even this global powerhouse makes use of the LLC structure. Why? By setting up their subsidiaries in different states as LLCs, they are able to take advantage of the tax benefits offered by each state.
Chrysler, one of the largest automobile manufacturers in the United States, is another example of an LLC. Chrysler was incorporated as an LLC and have maintained their LLC classification after being acquired by Daimler-Benz in 1998, subsequently divesting from Daimler-Benz in 2007, and eventually merging with Fiat in 2014 to form Fiat Chrysler Automobiles US LLC (FCA). Interestingly, FCA are currently in the process of merging with Peugeot Group. It is yet to be announced whether the new holding company, Stellantis, will also be incorporated as an LLC.
Although the process to form an LLC is easy enough to handle without special expertise, you may want to consult a lawyer or an accountant for guidance.