The Pros and Cons of Operating as a Limited Liability Company 

 It’s so hard to say goodbye to yesterday~ 
 
Geniuses, we have come to the end of the road of our first series. Drop a comment or leave a review and let me know what you think. Should we do another series? If yes, what do you wanna learn? Let’s ponder this question and come back to it. Last week we introduced a concept of limited liability for business owners through corporations. We also discussed the benefits, hello, access to capital, as well as the consequences, double taxation, we’re looking at you.  

Today, we’re talking about y’all’s favorite, the entity they can do no wrong. The formation that can defeat every obstacle your business faces. That’s right. Give it up for the limited liability company, also known as an LLC. 

And in case you couldn’t tell, I was just joking in my introduction of the LLC. Don’t take all that buffering seriously. And to be clear, I’m not saying that a LLC is good or bad. I’m just saying do your homework to make sure the formation will further your goals. Can we do that?  

Welcome to episode 121 of the Own Your Genius Podcast. We’re wrapping up our four-part series with the discussion of limited liability companies. You know how we do, we’re gonna answer the following questions: what a limited liability company is, the benefits of form a limited liability company, and the consequences. 

We’re also gonna to discuss how to form a LLC, the different kinds of LLCs, and the oh so important matter of keeping the liability. So the concept of the LLC originated in the United States in the late 1970s. Wyoming was the first state to enact the LLC legislation, and that was in 1977. And then other states were like, oh, I think I like that. I can get into that. So they started adopting similar statutes.  

The LLC was created to provide a business structure that combined the limited liability protection of corporations with the simplified management and taxation benefits of having a so proprietorship or partnership.  

There are people who form corporations under the misbelief that the limited liability provided by corporations is somehow stronger than the limited liability provided by an LLC. I’m just here taking a side note telling you that’s not it. That’s not correct. So cut it out. All right. Back to the program.  

Ultimately, the LLC is like a love child between a corporation, sole proprietorship, or partnership, which means it has characteristics of both. And when it comes to forming LLC, it’s not as complicated as forming a corporation, but it does take more than just waking up and doing an activity for profit, like a sole proprietorship and if that definition sounds like, what are you talking about? Go back to episode one 118 where we talked about sole proprietorship.  

So when you form a limited liability company, it’s gonna take three or four steps depending on what state you’re in, because again, this is state specific. The first thing you wanna do is. You wanna choose a unique name for your company and you wanna register that name or reserve that name. But here in Alabama we have to reserve that name with the Secretary of State until we actually file the article of the organization, which is the third thing you do. But what that reservation does is reserves the name while you get all the paperwork together to actually form the LLC. So that’s number one.  

Number two, you wanna make sure that you have a registered agent. It can be yourself or it can be someone else. A registered agent is the person who’s gonna receive your official correspondence and other legal documents on behalf of the LLC and the registered agent must have a physical address in the jurisdiction where the LLC is formed. Not a PO box or anything of that nature, but an actual physical address in the state where it’s formed. Once you decide who your registered agent is going to be, now you’re ready to file your articles of incorporation because that information board needs to be on that documentation and this document is filed with the your state Agency, and it’s gonna provide the basic information about the LLC. It’s going to know the name of the LLC, the address, the registered agent, and the purpose. You’re gonna have to file those things and pay the filing fee that’s associated with submitting that paperwork. 

Now in Alabama and other states, you are gonna need an operating agreement on what’s called a company agreement. And what that is, it’s a contract that outlines, the ownership structure, the management responsibilities, the voting rights, the profit sharing, and all these other important details of regarding the LLC members. 

And members, I don’t think we’ve talked about this, but I’ll tell you that members are owners. So when you have an LLC, the members are referred to as owners. So when you have this company agreement, it’s talking about the details on how the LLC members are gonna help run the company.  

Forming an LLC definitely has more steps in forming a sole proprietorship or partnership. But don’t let that fool you, because although it has almost as many steps as form a corporation, with that exception of the operating agreement, the steps that are needed to form the LLC aren’t really that complicated. 

Similar to partnerships and corporations, the type of LLCs that can be formed varies depending on your state. We’re gonna run through the five different types of LLCs that can be formed depending on where you live.  

The first one is the Domestic LLC, and it’s formed and operated within the state where it’s established. So when you form an LLC in the state of Georgia and your business operates in that state, that’s a domestic LLC, and that LLC is subject to laws and regulations of that specific state where it was formed and operates. 

Now the Foreign LLC is an LLC that’s form in one state, but operates in another. In this context, foreign doesn’t necessarily mean outside of the country, but rather outside of the state of formation. So for example, for my law firm in Alabama but I wanna open up a second location in Georgia. To operate as a oFreign LLC, I must comply with the registration and filings requirements of Georgia. Full law form will be conducting this, so I formed it here in Alabama. I’m opening up a second location in Georgia. So I’m gonna file the paperwork necessary to let Georgia know that I’m offering a business in their state. That’s what a Foreign LLC is. 

Now, the third one, some jurisdictions are going to allow for formation of what’s called a Professional LLC or also known as a PLC. This type of LLC is specifically designated for licensed professionals such as doctors, lawyers, accountants, and architects. And it allows these professionals to. Form an LLC while still complying with any of the professional regulations or licensing requirements because some of these professional licenses have been so that you can only operate and enter into certain agreements. So having this type of LLC allows you to have the limited liability that you need with the flexible management style and still adhere to your professional rules required for your license.  

In Puerto Rico and eight other states. They’re gonna allow what’s known as a Low Profit LLC or L3C. This specialized form of LLC is designed for businesses that primarily seek to achieve like a social or charitable mission, while also generating a modest profit. So you wanna serve the community, you wanna, you know, do good, but you also wanna make a little money. This L3C is aimed to blend a for-profit in the nonprofit goals to attract impact investors. Again, this one’s Puerto Rico and eight states. So not a lot of people have access to the L3C.  

The final type of LLC is a Series LLC. Now, this LLC, it’s been around for a little bit, but it’s just starting to get popular amongst the states. I think 22 states now allow for the series LLC. And what it does is essentially allow for the creation of what is like holding our parent LLC. And then under that, you’re able to create additional individual LLCs and those individual LLCs are called series. The beauty of a series LLC is that each series or each individual LLC will have its own assets on liabilities and own members. Which means each of these series are protected from the liability of the other. Okay? So a lot of people in real estate, they will create a series LLC and purchase properties under the individual LLCs because the structure provides additional asset protection and segregation of liabilities between the different series. So they’re like, oh, yes, that’s, that’s good. I wanna do that. And I wanna reiterate, not all the LLCs are available in every state. Therefore, you should do what? Consult with a qualified attorney or business professional that are familiar with the laws and regulations in your specific state to know your options and requirements for forming a particular type of LLC. 

So we talked about what a LLC is. We know how to form an LLC and we know that there are different types of LLC. Not that one LLC fits all. What’s next?  

Let’s get into why the limited liability company is so popular. Let’s get into that. 

Can we just say, “hello, Limited liability.” One of the main advantages of forming an LLC is that it offers limited liability to its members. Remember that members are what owners of an LLC are called. This limited liability means that the personal assets of the members are generally shielded from the company’s debts and liabilities and in, in case the business faces legal issues, such lawsuits or debts. The members’ personal assets are not at risk beyond their investment in the company. Have you heard that before? Yes.  

Ooh, second benefit. Hello. Pass through taxation. But unlike corporations, LLCs enjoy pass through taxation, which means a company profits and losses are not taxed on the entity level. Instead, they pass through to the members who report this share of the profits and losses and the individuals tax returns and that avoid to issue a double taxation faced by corporations where profits are taxed on both the corporate and the individual level. 

So far, we’re seeing that we got the benefit of the limited liability from the corporation without the consequence of the double taxation of the corporation. And I’m loving this.  

The third benefit, can we say, “hello, flexible management structure.” Though, with an LLC, members can choose to manage the company themselves, or they can appoint managers to handle the day-to-day operation and this is gonna allow for more and customized approach to running the business. They’re not tied to just having, you know, having officers that run and manage the day-to-day o having to do everything themselves. They can really choose what works best for their company. 

And the final benefit, can we say, “hello, ease of formation.” I know that I named, you know, a few steps from forming at LLC, but it’s really less complicated and requires fewer formal formalities compared to setting up a corporation and that paperwork and onboard and admin requirements that’s associated with corporations, you don’t have all that with the LLC. Which makes it easier and more cost effective to establish and maintain versus the corporation.  

These benefits are given the best of both worlds. It’s easy to see why the LLC is the Internet’s go-to, but before you jump on the bandwagon, let’s get into these consequences. So the consequences of forming an LLC, one, tough employment taxes. You remember these from our sole proprietorship and partnerships conversations, listen. So while LLCs enjoy, pass through taxations, members are subject to self-employment taxes on their share of the company’s profit. This includes both the employer and employee. Employee portions of Social Security and Medicare taxes, which can increase the overall tax burden for members. And I promise you, at a certain point, self employment taxes are no joke.  

Second consequence, and limited access to capital because generally LLCs cannot raise capital through selling stocks or issuing ownership and interest cause they don’t have that capability. This can restrict the company’s ability to attract large scale investments or go public. Which might be a consideration for businesses with significant growth aspirations. So if you’re looking to go big, you might want to consider another formation that can handle that growth.  

State specific regulations. When it comes to LLCs, each state has its own regulations and requirements for LLCs. This can result in various formation fees and ongoing reporting obligations. So for instance, if you did file the Foreign LLC, so you’ll have to adhere to whatever that state is telling you that you have to do as it relates to the regulations with LLCs. If you have multiple locations, you have to take care of the requirements for Georgia, Florida, Alabama, Texas, New York, whatever those are, you’re gonna have to. And they can all be different. So now, you gotta keep up with all these different regulations.  

And so as it relates to this consequences, you’re gonna have to understand and comply with each other specific regulations of the state in which the LLC is formed an operated, 

And the final one, the final consequence is this personal liability exceptions, because while the LLC does provide limited liability protection, there are some exceptions. Members can still be held personally liable if they personally guarantee debts, if they act fraudulently or engage in wrongful activities. It’s important to maintain proper. We talk about this all the time, proper separation between the personal and the business affairs to avoid what’s called Pearson and Corporate Veil. And when you do that, you lose your liability. You lose your liability protection.  

So overall, forming an LLC offers several benefits, including limited liability protection, pass through taxation, flexibility in management, and the either formation. Those are really good. But it’s really crucial to understand the specific needs and goals of your business and consult with a legal and tax professional who are, again, familiar with your industry and the state laws to determine if an LLC is the right structure for you. 

And when I was talking about the consequences, I briefly mentioned Pearson and Corporate Veil. I’m gonna go more into that, so make sure to tune in next week, especially if you have a corporation or an LLC, or considering forming one.  

We did it! We made it to the end of our series on business formations. I would love to hear your biggest takeaways. Make sure to leave a comment!