Hi, my name is Attorney Robert Vaksman, and today we’ll talk about why choose LLCs.
We are business attorneys among other things at our law firm, and we get asked quite often what business entity should I choose, and a lot of times we’re telling folks to be an LLC; a Limited Liability Company. As the name implies, you get limited liability which is one of the biggest reasons to even set up shop as a company versus being a sole proprietor, for example.
Why choose the LLC versus a corporation? Well, the thing is that corporations often have a lot of formalities. By formalities, what I mean is the State Corporations Code will require that you have a board of directors, that you have meetings all the time, that you have special meetings, that you keep minutes, just all these different formalities; whereas the LLC statutes, the LLC laws in your state likely won’t have as many formalities. So, while you can certainly have those formalities, you can have a board structure; it’s not required, but at the same time, you still have that limited liability. What that means is that, by the way, if someone sues you; a vendor, an employee or someone that you’re doing business with, they can’t get at your personal assets.
If you’re doing business with a vendor, a contractor, a marketing company, and for some reason they think that they have a claim against you, they can name you personally in the lawsuit because in America you can sue a ham sandwich, but that doesn’t mean that they’re going to win against you personally. If anything, they’re just going to be able to get at the business assets. That’s a huge reason why being LLC, is limited liability.
The other reason why being LLC instead of a corporation is the lack of formalities. You just don’t have those formalities, so they’re very popular for that reason. A lot of times, for example, if you just have even a income rental property, you have a piece of real estate that is an income stream for you, set up an LLC around it.
A lot of times people will own these properties and not think twice about putting an LLC structure around it. They say, “I don’t want to worry about any formalities. I know that LLCs are pretty simple, but I don’t want to about any formalities. I don’t want to think about the administrative hassle of filing tax returns on an annual basis. I don’t want to think about paying the state $400 or $800 every year to be an LLC.”
I hear that. I hear that actually pretty often as an attorney, but my advice is, think about it as an insurance policy. By the way, you might have an insurance policy on that building, but regardless, think about it as an added insurance policy that’s costing you $400 or $800 or $1,000 a year. Because if you have a piece of real estate and a vendor or someone else is on your property and happens to slip and fall, then sues you, why would you want to be concerned about a potential lawsuit? Why even think about that when you could have paid $400 or $800 a year and not be worried about somebody getting at your personal assets? That’s the issue here. Don’t even think twice. Consider the LLC.
If you want the formalities, if you want LLC where you have lots of partners and things of that sort, consider the LLC. One thing I’ll tell you is that if you’re thinking about taking in funding and potentially multiple rounds of funding, or if you’re even thinking about going public at some point, the LLC is not a good option. In that case, you’ll want to be a C corp in particular versus an S corp because, first off, S corps can’t go public only C corps can.
The other reason is that those companies in particular are much well suited, much better suited for multiple funding rounds rather than an LLC. The LLC is great for small businesses. The LLC is great for real estate, things of that sort.
Also, consider the LLC. If you have multiple pieces of real estate, don’t have just one LLC that owns all of those pieces of real estate, have individual LLCs for every single piece of real estate. Why? Think about it. If you have a slip and fall on one property and you only have one LLC that owns a lot of properties, that plaintive can likely get at all of the assets, can get at all of the other properties.
If you have insulated every single property with individual LLCs, well, then that vendor or that slip and fall, they can only get to that specific asset. In some, the LLC is a great way to limit your exposure, limit your liability, there’s one level of taxation, very little formalities to deal with unless you want them.
For all those reasons, you should really consider the LLC when choosing your entity. If you have any questions, always feel free to give us a call, we’re happy to answer them.