Why your Startup or Small Business Should (likely) Be An LLC
March 8, 2011 | By Vela Wood
Around VW, LLCs are the preferred vehicle for Texas small businesses and startups. An LLC is simple to setup, it is extremely flexible regarding the structure, rights and obligations of the members, and it is advantageous from a tax perspective. Now granted, LLCs are not always the right fit. If your idea is the next Groupon, or will be a Google target, then a C-Corp my be best for you. But for the vast majority of small business entrepreneurs, an LLC makes the most sense. Let us explain why.
1) It’s the least expensive entity to form. The Texas Secretary of State filing fees are $300. Same as for a Corporation, and $450 less than a Partnership. But when you include the legal fees associated with organization docs, the LLC comes out a big winner. Corporations have additional documentation and take more time (meaning more costs) to govern. Limited Partnerships not only have higher incorporation fees, but require a General Partner as well. Most General Partners are LLCs or S-Corps, so you’ll have additional Secretary of State filing fees there.
2) It’s very flexible. What I love about LLCs is that you can really make them what you want them to be. Want your only member to be another entity, instead of a natural person? Check. Need pass through taxation a la a partnership? No problem. Need classes of members with different distribution or voting rights? You got it. Need a series of LLCs for your real estate interests? Bingo. Moreover, there is no annual meeting requirement, which limits governance expenses for small businesses and startups.
We’ve structured LLCs that resemble partnerships (one managing member and several passive ones), and we’ve also set them up with multiple classes of members and a board of directors in a fashion that represents an S or C corp. An LLC can do it all.
3) It limits liability. Under an LLC, members (the partners in the company) are protected from liability for acts and debts of the LLC beyond their capital contributions. It is incredibly difficult to “pierce the corporate veil” of an LLC.
4) It is tax friendly. We always recommend that you have a good CPA in your back pocket, but an LLC allows you to be taxed like a partnership, which means that income only gets taxed as a pass-through to the individuals. Do note, however, that Texas now charges Franchise Taxes on all entities in Texas. That said, tax consequences of an LLC are still more favorable than a C-Corp and some S-Corps.
5) It can be converted. If the need arises, you can convert your LLC into a Corporation, Limited Partnership, or even a Real Estate Investment Trust. To be honest, you can convert your LLC to a General Partnership, but we would only recommend that under the narrowest of circumstances.
As we mentioned before, for companies that will likely raise substantial amounts of capital, Corporations are preferred (more on that in a later post). If you are unsure, consult with an attorney, or give us a call. But for the majority of startups or small businesses, LLCs are a one-size fits all solution.
Here are a few more links which you may find useful in your research:
The Texas Secretary of State Website page on Texas Entities: http://www.sos.state.tx.us/corp/businessstructure.shtml
The Texas Comptroller’s FAQ’s on Taxable Entities: http://www.window.state.tx.us/taxinfo/franchise/faq_questions.html#tax_ent