Choosing the Proper Foundation: LLC's

The Limited Liability Company (“LLC”) has emerged as one of the most popular business structures in the United States. An LLC is formed by filing a certificate of formation with the Secretary of State in the state where you wish to organize. The owners of an LLC are called members. One of the main advantages of an LLC is that it offers personal liability protection to its members while allowing profits and losses to pass through to their personal tax returns, similar to a partnership or sole proprietorship

LLCs come in different forms, including single-member LLCs, multi-member LLCs, and LLC partnerships. This blog provides a basic overview to help you understand if an LLC is the right choice for your business. However, it’s important to consult an experienced attorney or accountant for advanced guidance tailored to your business needs.

Legal Formalities

To form an LLC, you must file Articles of Organization with the Secretary of State, which includes a $99.00 filing fee. The Articles of Organization should contain:

1. Contact information for the approval certificate.
2. The LLC's name.
3. Effective date of the LLC.
4. Duration (if applicable).
5. Purpose of the LLC.
6. Name and contact information of the registered agent.
7. Name and contact information of a member, manager, or authorized representative.

While Ohio does not require an Operating Agreement, it’s highly recommended, especially for multi-member LLCs. An Operating Agreement outlines the inner workings of the LLC, such as how profits, losses, and distributions will be shared. It also specifies the roles and responsibilities of the members and helps prevent future disputes.

Advantages of an LLC

• Tax Flexibility: LLC members can choose how they wish to be taxed. The IRS may classify your LLC as a corporation by default, but members can elect to be taxed as a corporation, sole proprietorship (for single-member LLCs), or partnership.
• Limited Liability: Members are shielded from personal liability for business debts and obligations. Creditors cannot pursue the personal assets of the members, a protection not available in sole proprietorships or traditional partnerships.
• Management Flexibility: LLCs can be either member-managed (where members have authority to manage) or manager-managed (where management is vested in a board of managers elected by the members). This flexibility allows businesses to choose a management structure that suits their needs.

Disadvantages of an LLC

• Self-Employment Tax: Members of LLC partnerships are required to pay self-employment tax, including Social Security and Medicare. The profits pass through to members and are reported on their individual tax returns. In some cases, this tax burden may be higher than it would be under corporate taxation.
• Less Structure: LLCs have fewer formal requirements than corporations, which can lead to governance issues if a solid Operating Agreement isn’t in place. While creating this document requires some upfront cost, it can prevent problems later on.
• Lack of Uniformity Across States: LLC regulations differ from state to state, which can complicate matters if your business operates in multiple states. You may face different legal treatments once you cross state lines.

Making Informed Decisions for Your Business

Forming an LLC is an important step in establishing your business. While LLCs offer several advantages, they may not be the best structure for every situation. Be sure to review your options, and if you have any questions or need further guidance, call us at (614) 440-1395 or schedule a free 15-minute consultation on our website. We look forward to helping you take the next step with your business!

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