Limited Liability Companies (LLCs) are a relatively new business structure in California, and they have already become one of the most popular choices for business owners when forming a new business or starting to grow.
Should your company be an LLC? Here are the biggest questions you should ask yourself when deciding whether an LLC is right for you:
- Do you need limited liability?
Limited liability protects your personal assets from business liability. To determine whether you’d benefit from limited liability, we look at the potential risk inherent in your business, the value of your personal assets, and your tolerance for risk. There’s no such thing as a risk-free business, so limited liability is almost always a good idea. (See our article What Is Limited Liability and Do I Need It? for more information.)
- What type of taxation would benefit you the most?
By default, LLCs are taxed the same as if your business was a general partnership or a sole proprietorship: for tax purposes, the government does not consider your LLC to be a separate entity from you. This means that you do not have to file a separate tax return for your business, but the income and expenses “pass through” your personal return instead. This is why this entity type is often referred to as a “pass through” entity. Often, this pass through taxation is a benefit of LLCs, and leads to lower overall tax obligations. However, depending on how much money your business is making, how you’d like to pay yourself, and other factors, it might be more beneficial for you in the long run to elect to be taxed as a corporation. This is a question that’s usually best answered with the help of an attorney and a skilled CPA, who can run the numbers and weigh the pros and cons before making this important decision.
- Do you want to issue stock?
Most small business don’t need to issue stock. However, if your long-term goals include going public, selling the company, getting investors, granting employee stock options, or scaling to a national or global size, stock might be beneficial. If your company needs to issue stock, then a corporation would be a better fit for you than an LLC. [Note: An article outlining corporations is forthcoming!]
- What are your long-term goals for the business?
Your long-term goals for your business or your own life can affect whether an LLC is the right fit. For example, what would you like to happen to your business if something were to happen to you? Would you like to sell it someday? Go global? License it? Bring on partners? What are your plans for exiting the business, whenever that may be? Would you like to make it a family business and pass it on to your children? The long-term goals of your business are a factor many people don’t consider when they’re making the decision about whether to be an LLC, but choosing the wrong entity now can give you quite a headache later.
While it’s not impossible to change business entities if you someday realize that your current entity is not the right fit, it’s much easier (and cheaper!) to start with the right one from the beginning. If you’d like help making this important decision, contact us or book an appointment today.
