Many business owners initially set up their new business as a sole proprietorship. A Limited Liability Company, commonly called an LLC, offers advantages that a sole proprietorship does not. LLCs are a popular choice of structure for many Arizona businesses, but they are not always the best or right choice for every business and owner.
Finding the best structure to protect your business and your personal assets is extremely important. Whether you want to start a new business or run an existing business, Arizona offers many choices for the legal structure of your business. Different structures have different liability and tax implications.
From our office in Queen Creek, Peterson Law Offices, PLLC serves business clients throughout the East Valley. Our business law services include helping you decide on the best structure for your Arizona business.
Like any business structure, LLCs have both advantages and disadvantages. The advantages make LLCs a common choice for small and medium sized single-owner and multiple-owner businesses.
One of the most significant advantages of an LLC is exactly what the name implies — limited liability. Members of an LLC are not personally responsible for business debts. Business creditors cannot reach an LLC member’s personal assets in most situations.
In terms of liability, an LLC offers the same protection as a corporation. An LLC provides liability protection that partnerships and sole proprietorships do not.
An LLC structure offers flexibility for tax purposes. Initially, the LLC is not a separate or distinct entity for tax purposes, so the LLC itself does not necessarily file returns or pay taxes. LLC members elect how to file returns and how to pay taxes.
For a single-member LLC, the business elects to pay taxes either like a sole proprietorship, an S corporation, or a C corporation. Sole proprietorship tax treatment is the IRS default option for a single-member LLC. Choosing to file as a corporation requires filing an IRS form. A single-member LLC can change its tax filing status after formation as well.
When an LLC has multiple members, the members decide how to report profits and losses for tax purposes. The choice is between reporting taxes like a traditional partnership or as a corporation. If the members choose corporate tax reporting, the LLC files and pays taxes like a corporation. An LLC can make a choice between reporting as a C corporation or an S corporation.
The IRS automatically classifies some LLCs as corporations. In other situations, the members of the LLC create an Operating Agreement, which includes provisions relating to the method of tax reporting for the LLC.
LLCs are relatively easy to set up, as long as all required documents are created and filed. Once established, the paperwork requirements are minimal.
LLCs are not subject to burdensome rules and regulations. Unlike a corporation, an LLC does not have requirements relating to boards of directors or annual meetings.
For multi-member LLCs, the members have flexibility in setting up management of the company. Either members or outsiders (or some of each) can manage the operations. The members determine who has decision-making authority.
Along with the benefits, LLCs naturally have a few disadvantages. The first is that an LLC has a limited life. If a member leaves, dies, or declares bankruptcy, the LLC dissolves. Other types of business structures have longer life.
In some cases, the IRS determines the tax status of an LLC by default, automatically classifying the business as a sole proprietorship, partnership, or corporation. While LLC members select tax status in most cases, there is a risk of the IRS assigning a default classification.
If LLC owners do not choose tax status as a corporation for tax purposes, individual members pay self-employment taxes. Those taxes often are higher than corporate taxes. However, the decision on tax filing status involves other factors as well.
The management flexibility of an LLC sometimes is a drawback as well as a benefit. Members and employees may not be sure who is in charge and who has authority to make decisions. Drawing up an Operating Agreement for the LLC is a good way to resolve those issues or avoid them altogether.
Finally, if business owners contemplate taking the company public, an LLC does not provide that flexibility.
While an LLC is relatively simple to create, there are many steps in the process. Specific legal requirements apply to completing each step.
Missing one of the required filings may result in a fine or even automatic dissolution. The best way to ensure that your business formation goes without a hitch is to have a knowledgeable attorney assist with the formation.
Before you create an LLC, you should make certain that it is the best and right structure for your business. The only way to do that is to discuss your business and personal circumstances with an experienced business attorney.
An LLC is the right choice for many small businesses, but it is not necessarily the best choice for every business and every owner. Determining the right structure for your business requires taking into account your individual business goals and personal financial situation.
Attorney Shane Peterson knows business — and he knows the East Valley. Whether you need help starting a business, changing a sole proprietorship into an LLC, or addressing issues in on-going operations, Peterson Law Offices is here to help.
The Arizona legislature adopted a new statute for LLCs In the 2018 legislative session. The Governor signed the law in April. The statute includes many changes to the existing state law governing LLCs.
The law applies to LLCs formed after September 1, 2019, as well as existing LLCs that exercise an opt-in opportunity. After September 1, 2020, the new law will govern all LLCs.
If you have an existing LLC, your documents may need revisions to conform to the new statute. If you are forming a new LLC, it is essential to ensure that your LLC complies with the new law.
Additional details about the new law are available in our separate blog post, New Arizona Limited Liability Company Act / ALLCA Impacts New and Existing LLCs.
At Peterson Law Offices, we provide high-quality business law services at affordable prices. We welcome inquiries from clients throughout the East Valley, including Queen Creek, San Tan Valley, Gilbert, Mesa, and Chandler. Schedule your free initial consultation by calling 480-878-5998 or using our online contact form.
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