There are many different forms of business formations. Thanks to our last blog, you were able to understand and know about the different entities that prospective business owners can decide to form. All of them have their advantages and disadvantages, and it is up to the individual(s) and their counselors (attorneys, accountants, etc.) to decide which entity will produce the most positive outcomes for themselves and their business. For this month’s blog entry, we will discuss in more detail one of the most known business formations, the LLC. The LLC or a limited liability company has the benefits and qualities of a corporation and a sole proprietorship. The essential aspect of this entity is the personal liability protections that it brings to members of the company.
Who should consider an LLC?
Let’s provide you with a scenario that is very common among future business owners: Michelle recently graduated from a massage therapy program. Although she received multiple job offers upon graduating, she has decided to open her own business. She believes that opening her own company will provide her with significant financial independence. Here is the thing: She is not doing it alone. Two of her fellow massage therapy friends from school wanted to find success on their own terms as well. Michelle and her two associates decided that opening a business was the best way to obtain the success they have always wanted. They needed to choose whether they want to open a general partnership or an LLC. They discussed in great detail their concerns about opening a business that involved multiple people. Michelle then later remembered that one of her family members was affected by certain business dealings that affected not only his overall business but his personal assets as well. He had to give up some of his personal assets in order to compensate stakeholders due to a lawsuit. Michelle certainly did not want to face what her relative experienced. Coincidently, Michelle’s two friends also had similar experiences with family members regarding business matters. They also knew that the services they provide as massage therapists could make them more vulnerable to certain liabilities. They concluded that forming an LLC was the best route for them to take.
If you are opening a business that has multiple partners and if you are going to create a business that can potentially be more susceptible to lawsuits, consider forming an LLC. Below are some of the benefits and misconceptions about an LLC:
Business Structure and Separation
As stated before, one of the most essential benefits of opening an LLC business is the separation of business assets and personal assets. If any entity sues, then the only assets that a certain individual, business, or any other organization can go after are the assets of the business. Also, the business structure itself is so popular to form because it offers incredible flexibility to the point where you can make your own rules and create your own operating agreements. It is easy to establish and does not require as much paperwork as other entities such as corporations, which makes an LLC more affordable and easier to operate.
There is a reason why LLC stands for a limited liability company. Any financial or legal mistakes that any of the other members of a company creates that causes a lawsuit will not fall on your hands. They are responsible for their own actions. Although you may be a part of the business, any of the assets that entities will try to obtain are only business based. What that means is your personal assets such as your investment, retirement, and savings accounts will be left intact. This will certainly provide you with much-needed peace of mind. Also, if you will like to protect your personal assets even further, you can create an LLC to protect your estate. An LLC for your estate will protect you from creditors, lawyers and costs that may come about, such as costs related to court procedures.
There is a certain amount of credibility that LLC can bring to your business. Many individuals will see that you are an established business entity that will serve the needs of customers, employees and other important stakeholders. The best way you can add credibility to your organization is by incorporating the LLC abbreviation in your business name. This will create a positive impression on the audiences and other important entities that you are trying to reach. In Texas, it is required to have the LLC abbreviation in the name of your company.
Taxes are a part of any business entity. There is a difference when it comes to an LLC. When you establish an LLC, an important tax benefit includes being taxed just once. When you file your individual tax returns, you can report your business profits on this single tax form. This is known as pass-through taxation. When you establish other business entities such as a corporation, you won’t be able to avoid double taxation. This means the profits of the corporation are taxed prior being provided to the owners of this business entity. Once owners file individual taxes, these profits will also be taxed once more.
Because having an LLC business brings many legal protections based on liability, it does not mean that this business structure is meant for everybody. An LLC is beneficial if you have multiple members. If you are the sole employee and business owner, is it is much more cost effective to create a different form of business such as a sole proprietorship. You will save so much more in formation fees and registration fees that have to spend in order to maintain your LLC status.
Limited Liabilities, not No Liabilities
Limited liability does not mean total protection. The protections that are offered by this business apply when you and other members of the business have certain mishaps regarding investments. If you or other members of the LLC committed an inappropriate action such as misuse of funds and fraud, you will not be protected under limited liability and will be completely liable for these acts.
Forming an LLC in Texas
If you are considering forming an LLC business structure in the state of Texas there are certain steps that must be made. Thankfully, it is a fairly simple process. Although this may be the case, you must follow these steps accurately and in an orderly way in order to avoid any concerns that may arise. These steps and actions that are required on your part include creating and choosing a name for your business. In Texas, you must include “LLC” in the name of the business. You will also need to file a Certificate of Formation, also known as Form 205. The fee for this file is $300 if you are a for-profit company. You will also need to name a registered agent in order for the individual or entity to receive important correspondence such as tax information, lawsuits, pertinent information from the Secretary of State offices, and other significant correspondence that involves your business. Other important actions include obtaining an Employment Identification Number from the IRS, EIN for short, as well as creating an operating agreement. For more information on forming an LLC, speak to one of our representatives from the Law Office of Yates and Associates.
PLLC (Professional LLC)
An LLC is not so different from a PLLC. They both enjoy the tax benefits and personal asset protections, as well as liability protections regarding the investments that members contributed to the company. The key difference is that only certain individuals can create a PLLC. These individuals must be professionals. Each state has its own definition of what a professional is. In Texas, the list of professionals that can create a PLLC include lawyers, doctors, veterinarians, accountants, and architects. Creating a PLLC does not mean that any of these professionals are not liable for their own malpractice. It does, however, in most instances, protect individuals from the liabilities of the other professional members of the business. Although this is a great benefit to have, it is recommended that professionals obtain malpractice insurance in order to obtain the most protection possible if certain legal actions come about. This will help professionals perform their duties with ease. These professions come with a certain level of prestige. These professionals obtain such prestige because they are able to create a lasting effect on members of society. Each of these professionals carry an immense responsibility because of their significant influence. Any mistake, even if the certain professional was not responsible, can create a negative effect. Thanks to a PLLC, these individuals can obtain a level of comfort and protection from liabilities that can impact their careers in more ways that one.
Running a business is no easy task. There are many entities that you have to be concerned about. These include employees, customers, investors, and other businesses. All of these entities play a significant role in the success of a business. Each and every day, business owners are concerned with the daily operations of a business, and they must be able to remain in a positive state in order to fully be able to tackle any issues that may arise in any given day. These immense responsibilities can create a certain level of stress. This level of stress can intensity if certain things go wrong. Perhaps a customer is unhappy with the service or product or certain investor relations go sour. This can open up to potential lawsuits. As we have mentioned, the stress that lawsuits can bring can be exhausting. This added stress can potentially have a negative effect on your business and your personal well being. Thanks to LLC and PLLC organizations, you are able to reduce the possibilities of being held responsible for certain liabilities, while enjoying other benefits that can create important savings for you and your business. In our next post, we’ll discuss the benefits of another significant LLC entity, the Series LLC. This LLC involves one main LLC and other multiple LLCs that act as separate identities, so stay alert for this blog. You may find that creating a Series LLC will provide exceptional benefits as a business owner.
Ready to Get Started?
If you are considering opening a business, and would like to obtain the most financial and legal liability protections that you possibly can, consider forming an LLC or PLLC. The professionals at the Law Office of Yates and Associates can certainly help you decide if opening an LLC or PLLC is the right one to make. To speak to one of our associates regarding this business structure, simply click here to get started.