Limited liability companies, or LLCs, are business entities formed under state law. Their primary purpose is to limit the liability of their owners or members. Manager-Managed LLCs use managers to run the day-to-day business of their LLCs. In small LLCs, members might also be managers.

Advantages of an LLC

There are numerous advantages to forming an LLC. For example, your business will have a legal existence (as opposed to a sole proprietorship) and will be considered a distinct “person” that can, among other things, have a bank account, own property, enter into agreements, and engage in legal action. 

Because it is a separate legal entity, creditors of the LLC cannot assert claims against anything that isn’t owned by the LLC—including your personal assets such as your bank account and real property. Unlike with a sole proprietor or general partnership, therefore, forming an LLC substantially limits your personal liability. This is particularly important if you’re operating a business that exposes you to significant risks—such as a construction business, a physical retail business, or a business with a high risk of failure. 

Other advantages to forming an LLC include:

  • Taxation alternatives. Unlike corporations, LLCs themselves are not taxed. Instead, profits and losses are passed on to the LLC’s members, similar to a sole proprietorship or general partnership (depending on the number of members). As such, only the members are taxed in an LLC. In contrast, a corporation endures a sort of double taxation: once for the corporate entity and again for the owners, who pay income tax on their earnings from the corporation.
  • Protecting you from personal liability for the actions of other LLC members and employees in connection with business activities.
  • Providing structure to your business, especially if you have a multi-member LLC. The LLC’s Operating Agreement covers how decisions are made, how profits and losses are split among members, and how new and departing members are handled.

Alternatives to an LLC

Not every business needs to form an LLC. Nor is forming an LLC necessary to start a business. Some businesses function well using other entity types, including:

  • Sole proprietorships. In a sole proprietorship, one person will be the owner of the business. Unlike with other business entity types, sole proprietors don’t have any protection from personal liability for the debts or other liabilities of the business.
  • General partnership. This is where two or more people own a business. The partners have no protection from personal liability for their actions, or for their partners’ actions within the scope of the business. Each general partner is responsible for the debts of the partnership.
  • Limited partnership. A limited partnership is comprised of general partners and limited partners. General partners operate the business and are personally liable. Limited partners are essentially investors without the power to make decisions for the business. However, limited partners are not personally liable for their own actions or the actions of the partnership.
  • Corporation. A corporation is owned by the shareholders (sometimes called stockholders) who invest in the business by providing funds or other consideration necessary to operate the business. Shareholders elect a board of directors who are responsible for making major business decisions for the corporation, including selecting officers who run the day-to-day business of the corporation. In a startup or small business corporation, shareholders may also be directors and officers.

If you want to take on investors for your business, forming a corporation may make more sense since LLCs can’t issue stock. Many investors prefer corporations over LLCs for that reason. Similarly, if you’re a professional (i.e. doctor, attorney, engineer, etc.), some states may not permit you to form an LLC (although Georgia does). These states may instead allow the formation of professional corporations, professional limited liability companies, or professional limited liability partnerships.

Advice You Can Trust

At Becker Law LLC, we’re passionate about helping Metro Atlanta creatives and small business owners succeed. Contact us today to learn how we can help you form or expand a business, develop plain-language contracts, register trademarks or copyrights, and protect your company’s intellectual property.

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