Limited Liability Company (LLC)
LLCs have grown in their popularity over the last decade because they are a flexible and easily managed business structure. By and large LLCs seem to be the recommended form of entity for the majority of new businesses.
Pros of an LLC
- LLCs are known for their flexibility. LLCs allow for ownership interests and allocation of profits and losses to be split among owners however the owners desire (i.e. John Doe owns 50% of the company but he is only entitled to 30% of the profits).
- Owners have limited liability, and therefore their personal assets are generally protected in the event of a lawsuit against the business.
- Maintenance of an LLC (record keeping, legal formalities, etc.) requires minimal effort on the part of the owner.
- LLCs are not taxed as a business; instead, the owners include their profits and losses on their individual tax returns.
- LLCs are inexpensive to file. Filing for an LLC in Utah is $70.
Cons of an LLC
- Forming an LLC requires more work than forming, for example, a sole proprietorship, because actual paperwork must be filed with the secretary of state.
- Operating an LLC requires compliance with certain legal formalities in order to ensure limited liability. This means more paperwork, such as drafting an operating agreement that will serve to protect the company in many of its decisions, but it also means the business owners will have to put forth more effort in keeping the business assets separate from their personal assets.
- Register Online. Most states enable you to register your LLC online and will walk you through the process step by step. In Utah, you can register through One Stop Business Registration. This online registration only includes the articles of organization and assistance in obtaining your Federal Tax Identification Number, but does not include the company operating agreement, or any other agreements between business owners/partners.
- Have an Operating Agreement. You don’t need an operating agreement in order to operate an LLC, but you should certainly have one. Operating agreements do at least two things: (1) protect your business, and (2) protect you individually. If you’re starting your business venture with another individual, having an operating agreement can take a substantial amount of stress off of the owners in the event that a dispute should arise regarding which direction to take the business, how profits and losses should be allocated, how much capital should be left in the operating account at the end of the year, when the business can be sold, the method by which an owner/LLC member may remove himself from the business, and many other potential issues. It’s a good idea to consult with an attorney who has experience drafting operating agreements and handling business disputes to either write you’re operating agreement, or go over the one you already have. If you must use a free template found online, make sure you carefully read all of its provisions before the LLC officially adopts it.
- State a General Purpose for your LLC. When registering your LLC, you will be asked to state the purpose for which your business was formed. Utah allows for a general statement, such as, “The purposes for which this limited liability company is organized is to engage in and do any lawful act concerning any and all lawful business for which limited liability companies may be organized under the Utah Code and any amendments thereto.” Stating too specific of a purpose, and then engaging in acts inconsistent with that purpose, may affect personal liability of the owners in the event of a lawsuit down the road.
- Registered Agent. You will be asked to designate a registered agent. A registered agent is someone who can be located within the state of Utah for “service of process.” That means that if someone is going to sue your business, for example, they need to be able to serve the lawsuit papers on the business via this registered agent.
- Generally, have a Manager-Managed LLC. When filing your LLC you have the option of having the company manager-managed or member-managed. Member-managed means that any individual who is a member/owner of the LLC will take part in managing the company, and manager-managed means that a member of the LLC must first be designated as a manager before he/she will do any managing. Having a manager-managed LLC generally gives business owners more control over who does the managing of the company.