This question is usually overly complicated by clients and attorneys when the answer is usually quite simple: for the vast majority of small business start-ups an LLC will be perfectly sufficient for most purposes due to its reduced cost of formation, management, paperwork, and tax filing flexibility.
In situations where a passive asset is to be acquired, such as real property, a business vehicle, equipment that will be rented back to the business, etc., then an LLC is unquestionably the best choice as a holding company. Holding business assets in an LLC without that company conducting any other business activity is additionally very solid asset protection planning that is commonly employed. An additional method to increase such protection is to use an anonymous LLC structure where the actual owner is not listed in any public record, making litigation against the owner that much more difficult. Please inquire here for this service
For businesses without substantial hard assets that will interact with the public or other companies, enter into contracts, and accept payments, an LLC is a flexible structure that provides strong liability protections for the owners as well as managers, an inexpensive management structure, and tax filing options to fit any need .
To be more specific an LLC provides limited liability to all owners and managers (or they may be the same persons) so long as the company assets are segregated from the owners’ assets and good records are kept of all actions and financial transactions of the company. Different states have different rules regarding how easy or difficult it is to “pierce the limited liability veil” in litigation and obtain access to a defendant’s personal assets. For example California makes it far easier than say Delaware or Texas. For this and other reasons, a California company should be avoided as much as possible.
Management of corporations requires a board, resolutions for every action, regular meetings of the board and/or shareholders for some major actions, and a far more complex taxing structure, meaning the corporation will pay taxes separately on its own earnings in addition to its shareholders and management. An LLC requires none of the above. Meetings are not required, and total management of all operations may be delegated to managers or manager-members without a need for meetings or written documentation. Resolutions or operating agreement amendments may be occasionally required with major events such as addition of new members, withdrawal of members, restructuring of the company, or termination, but this is negligible compared to the expense of corporate governance.
The most important part of LLC formation is a carefully drafted operating agreement, which may actually get rather complicated due to the many tax rules and regulations which must be followed due to the flexibility of the LLC. An LLC may have different interests and proportions with respect to the members for each facet of its management and governance irrespective of the capital contributions of the members, such as voting rights, allocations of profit or loss, distributions, and allocations for tax purposes, in other words the LLC may have two sets of books because tax filings may make different allocations than what is made in actual operations. It’s important to get this part right and have a CPA knowledgeable regarding LLC’s, in addition to a competent attorney taking care of the legal requirements. Please feel free to contact this firm with any additional questions.