NFIB

Selecting the Best Legal Structure for Growth: Part VI--LLC Pros and Cons
10/ 01/ 2002

by Andrew Sherman

This series of workshops will give you an overview and comparison of the basic business formats to consider (proprietorship, partnership, corporation or limited-liability company), both at the outset of a new venture and periodically throughout your company's growth.

Advantages of an LLC

Members of an LLC enjoy the same protection from personal liability that officers and shareholders of a corporation do. The LLC itself does not pay federal income tax. If properly structured, it will be classified as a partnership for tax purposes and be exempt from state income or excise tax. It allocates taxable income to members, who pay at their personal rates (which avoids double taxation). The members can write off the LLC's losses to the extent of their tax basis in the LLC, including their share of the company's debts. In contrast, shareholders in an S corporation can write off losses only to the extent that such losses exceed the money they have contributed to the company in the form of capital stock and loans.

Management authority can be delegated to specific members, or to professional managers who are not members of the LLC. Once the operating agreement is formed, there are few other formalities like those that corporations must follow, such as holding annual meetings or issuing stock certificates.

Unlike an S corporation, there are no restrictions on the number or type of owners or multiple classes of stock. An LLC also differs from an S corporation in the fact that distributions of property can be made without the realization of taxable gain.

Disadvantages of an LLC

In most states, the death or withdrawal of a member will trigger the dissolution of the LLC. However, under most operating agreements members may elect to continue the company's operation. That's what usually happens.

A member who is also a manager may be required to treat his share of the income as self-employment income subject to additional taxes to fund social security and Medicare.

In some states, an LLC doesn't qualify for state tax credits or sales and property tax exemptions for which corporations qualify.

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Andrew Sherman is internationally recognized as an authority on the legal and strategic aspects of entrepreneurship and business growth. As a senior partner with McDermott, Will & Emery, he manages a multi-million dollar corporate and transactional practice, representing Fortune 1000 corporations as well as hundreds of technology-driven, netcentric and rapidly growing businesses.

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