Is a Limited Liability Company (LLC) right for you?
Is an LLC right for you?
For many who have gone into business for themselves and many thinking about launching a new business, one of the most important questions to ask is “what type of entity gives me the best legal protection and the best tax advantages?” Many such business owners predominantly select a Michigan Limited Liability Company. An LLC is often preferred over a corporation or other business entities such as limited or general partnerships. Each is a legitimate option whether you are an aspiring entrepreneur or established business owner.
If you have questions about starting a Limited Liability Company, you should contact LLC and corporate business attorney Matthew Abraham or call 810.750.0440 to determine the best business strategy for you.
So What Type of Business Entity Do I Need?
“One of the very first decisions that founders must make is in what legal form to operate the business, but founders often start a business without consulting a lawyer and, as a result, often incur higher taxes and become subject to significant liabilities that could have been avoided if the business was started as a corporation or as a limited liability company (“LLC”).”
This is the first question to ask and answer when preparing to engage in or launch a new business venture and even when forming an entity for an established business. While there are many benefits of forming a limited liability company (LLC), it is important to understand why you should consider forming an LLC over other available types of entities for your business.
Business owners and entrepreneurs have 4 principal types of entities under which to conduct a for-profit business in Michigan:
- LLC
- Corporation
- Limited Partnership, and
- General Partnership
The general partnership has essentially become obsolete since it offers no protection to the owner from individual liability and does not permit any alternative tax choices.
Historically, a limited partnership ("LP") was the entity of choice especially in holding and operating real estate based business ventures and the corporation was the primary entity of choice to operate a for-profit business. However, since the creation of the LLC which became authorized under the State of Michigan’s Limited Liability Act of 1993, the LLC has set itself apart as the preferred business entity of choice in the state of Michigan and around the United States.
Asset Protection: The LLC, the Same as the Corporation.
In Michigan, LLC's offer the same liability protection as a Corporation. Members of an LLC are akin to shareholders of a corporation. In both types of entities, you as the owner (member of the LLC or shareholder of the corporation) typically receive the benefits of protecting yourself individually from company liability and debts. The LLC, however, has fewer formalities to follow than a corporation does.
A Michigan LLC allows you to avoid several formalities that are otherwise required for Michigan corporations. Michigan corporations must satisfy certain requirements that include:
- annual meetings of shareholders,
- annual meetings of the board of directors,
- documented meeting records of shareholders with minutes and/or resolutions,
- documented meeting records of the board of directors with minutes and/or resolutions.
While certain formal actions of the LLC may still require a specific company resolution, an LLC does not require annual meetings of either its members or managers which are the counterparts to a corporation’s shareholders and directors.
This is one of the main reasons educated business owners prefer to utilize an LLC entity over a corporate entity. The Michigan LLC simply does not have any of the corporate formalities listed above. A Michigan LLC is not required to have regular meetings of the members or its manager(s). Nor is it required to document such meetings with minutes or signed resolutions. Only when necessary for certain transactions or business dealings, may a company resolution be necessary for an LLC to execute. Since the primary purpose of an entity is liability protection, an LLC is often considered superior since it does not need to observe the formalities required by a corporation to preserve the legitimacy of such protections. If a creditor of the LLC tries to “pierce the company veil” and hold the individual members liable for the debts of the LLC entity, the LLC is not required to have undertaken these corporate requirements to preserve that protection. The corporation however, will be required to have satisfactorily undertaken all of these requirements and to have documented those actions.
The LLC Has Multiple IRS Tax Options
Another significant reason the LLC is favored over a corporation is because the LLC has maximum flexibility in its selection for federal income taxation. While corporations can only choose between 2 restrictive methods, an LLC can choose the best of 4 different options of federal income taxation. This gives the business owner and its tax advisors a great degree of autonomy in deciding what is the best selection so as to minimize the LLC’s taxable consequences. LLCs have a certain number of days from the date of the LLC’s formation to decide which option to choose in how your entity will be taxed and then you must file the necessary election form with the IRS. Many times this can simply be accomplished at the time the entity files its first annual tax return.
While many ‘old school’ tax advisors automatically advise clients they need an "S" corporation, the LLC has additional options to choose from.
The terms "C-corporation" and "S-corporation" do not refer to the type of entity as is commonly misunderstood. These are IRS tax elections that refer to the specific subchapter of the Internal Revenue Code (IRC) under which an entity may elect to be taxed for federal income tax purposes. Like corporations, LLCs may indeed choose to be taxed under either subchapter ‘S’ or subchapter ‘C’ sections of the IRC. Regardless of whether the LLC elects either of those ‘C’ or ‘S’ methods of federal income taxation, the LLC does not convert itself and become a corporation entity. The LLC continues to be an LLC even if it is taxed under either subchapter S or subchapter C of the Code. It may in fact be advantageous for the LLC to elect a subchapter S or C option depending upon the type of business the LLC is engaged in or the type of income and revenues the LLC expects to generate.
Selecting the Best Tax Option For Federal Income Tax Purposes
When clients form a corporation, it must be taxed in one of two ways: either under IRC subchapter C or subchapter S. However, in forming an LLC, our clients have 4 possible options to select for federal income taxation purposes: The four elections of a Michigan LLC are to be taxed:
- as a sole proprietorship or disregarded entity (this option is available if the LLC has only one member or two members who are a husband and wife who own their interest together by the entireties),
- under IRC subchapter K as a partnership (an LLC with 2 or more members),
- under IRC subchapter C as a "C corporation," or
- under IRC subchapter S as an "S corporation" (if the LLC satisfies the requirements for subchapter S taxation).
Each of these options offers entrepreneurs and business owners the ability to consider and determine the best strategy to take advantage of the different IRC elections to minimize the tax consequences of their business venture.
Abraham | Law works and consults directly with an experienced CPA Accounting Firm to make sure our client entrepreneurs and business owners make the best tax choice available to them. Our office will also work with your current CPA or accounting firm to make sure the best option is selected.
BUILD YOUR BUSINESS ON A SOLID FOUNDATION
Many startup companies, entrepreneurs, self-employed businesses, and developing organizations are choosing to organize and form LLCs as opposed to traditional corporations because the LLC is typically cheaper to form, less expensive to maintain and operate, has more options with four choices of federal income taxation, and has fewer annual filing and recording formalities than corporations. It is important that you build a solid foundation upon which to launch your business endeavor. Take the right steps by consulting with an experienced business attorney to make sure you are building a solid foundation upon which to launch or expand your vision.
Contact Abraham | Law to get your business off the ground the right way by setting up your Michigan LLC today.
If you have questions about starting a Limited Liability Company, you should contact LLC and corporate business attorney Matthew Abraham or call 810.750.0440 and determine the best business strategy for you.