Why LLCs are the “middle ground” business formation option

On Behalf of | Mar 25, 2023 | Business & Commercial Law

When an aspiring business owner settles on a particular structure, this decision will impact everything from how the company will be taxed to whether the owner’s personal assets will be shielded in the event that the company incurs debts it can’t pay or is sued. 

That makes choosing a legal structure for a new business a consequential process.

How do LLCs stand up against other business models?

Many new businesses start out as either sole proprietorships (owned by one individual) or as partnerships (owned by more than one individual or entity). These approaches do not take much effort to formalize, they allow for maximum flexibility regarding a company’s management structure. They are also taxed on the personal returns of their owners, which has its advantages.

The primary drawback to these structures, however, is that they do not provide any personal liability protection in the event that a company incurs debts or is sued. On the flip side, corporations provide maximum personal liability protection for the shareholders that own them. But, these companies are highly regulated, have a strict managerial hierarchy and require a lot of effort before they can be formally launched.

Limited liability companies (LLCs) are the “middle ground” option. Like sole proprietorships and partnerships, they are relatively flexible entities and don’t require much effort to launch. Like corporations, they offer significant personal liability protection and are subject to some reporting requirements. They can be taxed either as distinct entities or on the personal returns of their owners. 

As a result of how consequential choosing a business structure is, it is important to think critically about your options if you’re looking to launch a new enterprise. Not every structure is well-suited to the needs of every business. By determining your new company’s legal structure thoughtfully, you’ll better ensure that your new venture is set up for success.