I was interviewed recently by Kelly Spors of The Wall Street Journal for a Q & A piece ("Steps to Take to Form an LLC," published in the WSJ, March 13, 2007). After going through the usual informational spiel I am accustomed to providing to reporters, it occurred to me that since LLCs are no longer the new kid on the business entity block, having reached at least adolescent age among its business entity peers, it was time to take inventory of its current pluses and minuses:
+ State-law limited liability law still provides relatively cheap protection against personal liability for business debts and claims.
- In some states, LLCs are charged an extra $500 or more annually to do business as an LLC. In California, for example, an LLC can be charged up to $12,000 annually in state fees and taxes if it has significant gross receipts.
+ Forming an LLC will not normally change the current tax status of a business. A sole owner of an LLC continues to file Form 1040 Schedule C to report profits and losses; a co-owned LLC continues to file a 1065 partnership tax return.
- Any co-owned business is treated and taxed as a partnership. Partnership tax law is no piece of cake, and it takes a real tax expert - someone who normally charges a lot - to handle these taxes and tax calculations correctly. Further, co-owned LLC treatment under the partnership tax rules is even more complicated. You'll need to find a good tax person, steeped in partnership taxation, to handle a co-owned LLC's taxes.
+ LLCs are good for setting up special management arrangements among co-owners. LLC law is flexible and allows an LLC operating agreement to be custom-tailored to fit special management needs (with special member-managed or manager-managed rights and responsibilities).
Bottom Line: I usually conclude all interviews with the following tagline: Make sure to tell people to decide they definitely need an LLC before they form one ("if it ain't broke, don't fix it"). If your business is reasonably insured and not subject to special risks, and if you don't need to set up a special type of management structure to suit your special business needs, you can probably get by just fine without filing LLC formation papers with the state.
Copyright 2007 by Anthony Mancuso
This article is provided as information and opinion. Please check with a legal or tax advisor for legal or tax advice.