Should Your Arizona Small Business Be an LLC / Limited Liability Company?
When you start a new small business, you choose a business structure — either actively or by default. Creating an LLC (Limited Liability Company) is a popular option for new businesses and existing small businesses that are growing. Before you decide to create an LLC, you should understand how an LLC works, what other options are available, and what it takes to establish an LLC. In our business law practice at Peterson Law Offices, PLLC, we help owners of new and existing businesses determine the best structure for their company and establish an LLC when it fits their goals.
What Is an LLC / Limited Liability Company?
An LLC is one of several types of business structures that Arizona allows a small business owner to choose for the legal structure of their business. Other basic options are a sole proprietorship, partnership, and corporation. The choice of legal entity affects critical issues like liability and taxation, as well as other matters relating to business operations.
An LLC is a hybrid business structure that gives owners the flexibility of having the pass-through taxation of a partnership. Generally, profits and losses are passed through to the personal income taxes of LLC members, who are considered self-employed and pay tax contributions to Social Security and Medicare. Certain LLCs may have the option of choosing to pay taxes as an S corporation under the federal Internal Revenue Code. Taxation is one of the primary issues that you should discuss with your business lawyer before you decide on the structure of your business.
Personal liability protection is the other primary advantage of an LLC. In a sole proprietorship (the default structure for a single-owner business owner who does not actively establish a business structure), the business owner’s personal assets are subject to creditor claims arising from business obligations and debts. In contrast, members of an LLC typically are not personally liable for business debts. Creditors cannot reach personal assets like an LLC member’s home, car, or bank account, to cover business unpaid debts or losses.
Arizona has a specific statute that governs establishment and operation of limited liability companies. The Arizona Limited Liability Company Act, effective in 2019, includes complex provisions that apply to all LLCs in the state. If you consider creating an LLC for a new or existing small business, you should talk with a knowledgeable business law attorney about how the statute will affect your business if you establish an LLC.
Forming an LLC in Arizona
While forming and running an LLC is often less complicated than other types of business structures, there are specific legal requirements and formalities that must be followed. While it is possible to create an LLC without help from a business law attorney, taking that approach risks making mistakes or omissions that could cause significant legal issues in the future. Even missing a required filing may result in a fine or automatic dissolution.
Working with a knowledgeable attorney to establish an LLC for your small business also ensures that you understand all the legal requirements that apply to operations and LLC maintenance going forward. Your lawyer also helps with other important legal concerns relating to setting up your business.
When you establish a relationship with a business law attorney as part of setting up the structure for your business, you have a solid foundation for getting trustworthy help with business legal matters that arise in the future — as they inevitably will. Ongoing legal support for your business can help you minimize or avoid issues that arise, which allows you to focus on business operations rather than issues that interrupt the flow and growth of your business.
Potential Drawbacks of an LLC
While most discussions about LLCs focus on the advantages offered by choosing this legal structure, there are drawbacks inherent in an LLC. You should be aware of them before creating an LLC, so you make a fully informed decision about the structure of your business.
While taxation of an LLC is generally more advantageous for a small business owner, deciding on tax status for the LLC involves weighing a number of different factors and making specific decisions. Getting sound guidance on the tax issues is essential for both choosing the structure and choosing the tax filing status for an LLC.
Another drawback of an LLC is that the structure has a limited life. If a member leaves, dies, or declares bankruptcy, the LLC dissolves. Other business structures have a longer life. In addition, an LLC does not provide the flexibility of taking a company public, if the business owner wishes to consider that option.
Schedule a Free Consultation With an East Valley Business Law Attorney
As a small business owner, you want to choose the best legal structure for your business. In our business law practice at Peterson Law Offices, we help Arizona small businesses establish a solid legal foundation by choosing the right structure, whether the business is new or established and growing.
We know that small businesses, whether new or established, often do not need a full-time lawyer but do need reliable, responsive legal counsel throughout the life cycle of the business. Our goal is to help your business succeed, grow, and thrive, while minimizing legal problems you encounter and finding the best solutions for the issues that do arise.
Your initial consultation is always free of charge. 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.
