Should Your Start Up Be An LLC?

This is a common question among new or experienced business owners. First, an Limited Liability Corporation (LLC) is a mixture between a partnership and a corporation. In other words, an LLC is a hybrid business entity, which is common within the last twenty (20) years.

The basic characteristics of an LLC are the following:
1. Flexibility

The greatest asset for an LLC is its' flexibility. Personally, start up companies should strongly consider the flexibility that an LLC offers. This flexibility is important because a start up company can have different forms of ownership classification. This is important because a venture capitalist or an angel investor or family friend wants to know that their investment is secured to the best of their ability. With an LLC, an investor may own non-voting stock or membership interests and be first in line in case of the dissolution of the business. As a rule, non-voting shareholders/owners get a preference in getting paid back first with an LLC. This is not possible with an S corporation because an S corporation only allows one type of stock. Second, many start up companies want the investment but they do not want the investor interfering with their ability to run and manage the day to day affairs of the company. The LLC gives start up companies and their owners the flexibility of negotiating any type of arrangement that one can envision.

The second trait is taxation. An LLC is similar to a partnership because of its' flexibility and its' tax treatment. With an LLC, each business owner may own 50 percent of the LLC but share profits and losses in a different proportion. Possibly, the first three (3) years, the start up company will agree to give the investor a disproprotionate profit due encourage the investor to invest in their new business venture. An LLC is a disregarded entity because the LLC and its' owners do not pay tax for the LLC. Instead, the owners will file their LLC membership interest on their personal tax returns based upon their income, losses, and deductions.

The third trait is costs. An LLC in Illinois is considerably more expensive than starting a Corporation. In Illinois, the LLC costs a minimum of $500. In contrasts, a Corporation starts at $175. The annual maintenance costs are similar as well. For most start ups, capital is a big issue especially during the first three to five years of the business.

The fourth trait is your individual business and personal goals. An LLC is great if you have a desire to build a profitable entrepreneurial company that has multiple employees and/or owners. If your goal is to build a profitable business with minimal employees and owners, possibly the S corporation will better serve your interests. The reason is due to ccosts.

Sean Robertson is a business and corporate attorney based in downtown Chicago, Illinois. Sean Robertson may be reached at (312) 498-6080 or Sean@RobertsonLawGroup.com.