When aspiring business owners start tackling the process of legally forming a new company, they generally begin by choosing a formal structure. As the formation process differs for each formation structure, this approach makes sense. In order to better ensure that each company is formed in ways that best suit their owners’ needs and overall entrepreneurial vision, the pros and cons of each must be carefully assessed.
If you’re launching a new business for the first time, you may not know exactly how to evaluate whether each structural option will be a good “fit” for your priorities and operational expectations. A good rule of thumb is to start by learning about the limited liability company (LLC) structure and then weighing the pros and cons of the alternatives against that informational foundation.
The middle ground
The reason why it can be helpful to start by learning about the LLC option is that it serves as the middle ground between the rigid corporation structure and the ultra-flexible sole proprietorship and partnership structures.
A single individual or multiple entities can form an LLC. LLCs offer their owners (called members) personal liability protection if their company gets sued, incurs losses or files for bankruptcy. They can be taxed as a distinct entity, like corporations are, or they can be taxed on members’ individual returns. The state imposes some reporting requirements on LLC members but the company management structure is relatively flexible.
The primary alternatives
Corporations offer maximum personal liability protection for the shareholders who own them but they are also much tougher to form and they are subject to rigorous reporting requirements and managerial structure. Sole proprietorships and partnerships are easier to form than LLCs and aren’t generally subject to much reporting. They offer maximum managerial flexibility but little-to-no personal liability protection for their owners.
Like many things an aspiring business owner will do in getting a business launched, the decisions may require some assistance to better understand the nuisances and the comfort of knowing that the formation was properly done. By carefully assessing each option in turn and getting assistance, you’ll be able to make an informed decision about whether the LLC structure best suits your new company’s needs. This is a consequential decision you’re making, so take your time when thinking it through.