LLCs: The Go-To Option For New Business Owners
Limited liability companies, known as "LLCs", have in recent years been the go-to option for new business owners. When we sit down with clients to go discuss business formation and planning, they often know that their business entity should probably be an LLC, but they don't necessarily know why. A brief history lesson is necessary to this understanding:
Corporations originated in Holland in the 1500s and were designed to protect the promoters and investors of spice and trading ships from personal liability in the event of a shipwreck, pirate attack, or other catastrophe. This concept, known as the "corporate shield", was carried over to England when the Dutch monarch became King William III in the late 1600s. From there, the concept came to the United States when the colonies developed a legal system based on the English common law. The first LLC statutory scheme appeared in Wyoming in the late 1970s as a way of attracting business franchises to the state. In Ohio, Revised Code, Chapter 1705, which was enacted in 1994, governs LLCs.
There are several advantages to LLCs, which can be summarized in one word: flexibility.
LLCs are a sort of hybrid entity which combine the corporate shield from a corporation with the tax advantages of a partnership. The corporate shield protects the owners or "members" of an LLC by limiting liability to the assets of the LLC, absent fraud, tortious conduct by an member, or a personal guarantee, etc. In other words, if judgment is rendered against the LLC, an member's personal assets are typically not available to satisfy the judgment. Moreover, LLCs can elect partnership or "pass through" taxation, where income flows through the LLC and is reported on the members' Form 1040.
LLCs are governed by a contract among the members, known as the "operating agreement". The operating agreement varies depending on whether the LLC is single-member or multi-member; whether it is member-managed or manager-managed; whether there are transfer-on-death or family limited buy/sell provisions; etc. The operating agreement provides for the rights and responsibilities of the members and managers, and it can be tailored depending on the needs and goals of the client.
To find out whether an LLC is the right fit for your business, and how you can tailor it to fit your specific circumstances, contact Stubbins, Watson & Bryan Co., L.P.A.