Business and risk are joined at the hip. And they’re inseparable. You can’t have one without the other. It’s best to face that cold reality right from the get-go.
In a worst-case scenario, you risk losing your business, all of its assets, every cent you’ve invested in it, plus most of your personal assets to satisfy the debts and obligations of your failed enterprise.
The mere prospect is enough to give even the most self-assured entrepreneur a case of hives. (If you’re deathly allergic to risk, now is a good time to rethink the notion of starting a business of your own.)
But there are ways to structure your business that reduce the risks by reducing the personal liability.
The limited-liability company – or LLC – is one of the most popular legal structures for a business today. An LLC offers the personal liability protections of a corporation, meaning the personal assets of members are insulated from claims against the company in most cases. It also has great flexibility when it comes to how the business is taxed and how profits and losses are passed through to the owners.
Is the LLC the right business structure for you? There are several factors to consider:
LLCs tend to be about as expensive as a corporation, but the process for setting one up is much less involved. The rules and procedures for establishing an LLC are set out in state law and penalties for not following the law can be severe. Owners of an LLC may need more professional guidance (especially on organizational and operation decisions), which increases costs.
Except for fraud or other cases of wrongdoing, the owners of an LLC are generally not held personally liable for the debts and obligations of the business. Just as with the shareholders of a corporation, their risk of loss is limited to what they’ve invested in the company. Owners of small, closely held, or newly organized LLCs may be required to give personal guarantees of repayment to secure financing or credit.
Profits and losses of an LLC can be treated as a sole proprietorship, a partnership or C corporation, depending on how they owners have decided to be treated. Under circumstances dictated by state law, the company’s articles of organization or board of governors may provide for a different allocation.
Like a corporation, an LLC has centralized management. By state law, it is managed by a board of governors composed of one or more individuals. In addition, it must one or more people acting as chief manager and treasurer. As with a corporation, many of the rules governing management are set out in the articles of organization, bylaws, or by state law.
The LLC is financed by contributions from members. It also may invest its own funds, borrow money and trade in the securities of other organizations and the government. Because they can create multiple membership classes and series, LLCs offer more flexibility in structuring outside financing than S corporations. Unless prohibited in its articles, LLC members have the right to increase their own investment before the company accepts contributions from outsiders.
Whether or not an LLC is dissolved once a member’s interest is terminated depends on the process outlined in the articles of organization or a member control agreement, or if the last member terminates and no new members are admitted within 180 days. Otherwise, the termination of a member’s interest does not affect the existence of the LLC.
For LLCs formed before August 1, 1999, the termination of membership of any member terminates the existence of the LLC, but the articles of organization may permit the remaining members to continue the business by merging into another Minnesota LLC or into a Minnesota or foreign corporation.
Rules governing the LLC are established by state law as well as the company’s articles of organization and operating agreement. These rules are similar in complexity to those governing partnerships and corporations.
Tax issues for an LLC depend on how the company elects to be treated for tax purposes. An LLC may be treated as a sole proprietorship, partnership or a corporation. LLCs with more than one member may choose to be taxed as a partnership or a corporation. Either way, it must obtain federal and state tax identification numbers.
An LLC with only one member may be taxed as a corporation or as a sole proprietorship. If taxed as a sole proprietorship, the company generally does not obtain a federal or state tax ID number.
Consultants at our Small Business Assistance Office can help you understand more about Limited Liability. And our network of Small Business Development Centers has experts located in nine main regional offices and several satellite centers statewide.
Our Guide to Starting a Business in Minnesota provides a detailed look at this and other important issues.
