There is generally no one legal structure that works best for all small businesses. The best choice depends on a number of things, including the number of owners, your tax situation and whether or not you have employees. A limited liability company (LLC) may be a good choice because it provides flexibility, low maintenance, favorable tax treatment and most importantly, limited liability protection to keep your personal assets safe.
A well-organized LLC combines some of the aspects of partnerships and corporations into one entity. For example, general partnerships and sole proprietorships generally have no insulation from liability. But by statute, a member of an LLC has limited liability and no personal responsibility for the debts or liabilities of the entity or the other members.
LLCs can work well for family businesses that have exposure to product or other liabilities, real estate enterprises, and service companies.
Discuss the specific benefits of the LLC structure with your attorney and Filler & Associates. The laws regarding LLC do vary from state to state, and Filler & Associates can help you navigate specific Maine laws. We have come up with a list of general LLC issues to consider:
Federal and State. Limited liability companies with more than one owner can avoid double taxation because they can be treated as partnerships for tax purposes. An LLC with a single owner can be treated as a sole proprietorship for tax purposes.
An LLC files a federal tax return, but passes through all of its tax profits or losses to its member or members, who then pay tax on their personal returns. This differs from a C corporation structure, where your company pays taxes on its earnings and then you pay again if the company’s post-tax earnings are distributed to you as taxable dividends. Filler & Associates can help you understand all the aspects of different business entities.
Employment. LLCs, like S corps and partnerships, distribute income to their members and the money isn’t considered wages by the IRS so there are no employment taxes. However, members may owe self-employment tax. Of course, an LLC must pay employment taxes for its employees. Again, discuss the specifics of your situation with Filler & Associates.
The Basics of Setting Up
Formation. Forming an LLC in Maine is fairly easy: You file an Articles of Organization form with the state of Maine and pay a fee. You also create an operating agreement among the members, which establishes members’ rights, the percentage of ownership and the share of profits. Usually you have to publish a notice in a newspaper a certain number of times, which may be expensive depending on your location.
Owners can include corporations, partnerships, other LLCs or trusts. An operating agreement should also contain provisions for the company’s management structure and any other financial details you want, such as ways to use the LLC in estate planning. Filler & Associates is experienced with all the details of setting up an LLC in Maine.
Liability and Succession
Limited liability. Though LLC members aren’t personally liable for the company’s debts or obligations, it is not blanket protection. Members can still be liable for debts if they personally guarantee them. And they’re liable for any professional malpractice or other bad business practices. Beyond that, members are liable only up to the amount of their capital contributions and the amount they agree to contribute to the firm’s capital.
Continuity. Interests are not freely transferable and a transfer may be subject to securities law regulations. An LLC could go out of business upon the death, disability, bankruptcy, retirement, resignation or expulsion of a member. The remaining members would then have to finish outstanding business and distribute assets among themselves. This can be avoided by including a “buy-sell” provision in your operating agreement. Filler & Associates can provide guidance on this issue.
An LLC’s tax advantages, combined with corporate-style insulation from liability, can make it a suitable and cost-effective small business models. Consult with Filler & Associates about the best business entity for your situation.