Why Choose to Form Your Business as an LLC?
It’s the best choice for some New Jersey businesses, but owners must compare all options
on September 18, 2018
Updated on July 1, 2022
In the array of business entity choices, the Limited Liability Company (LLC) comes right in the middle. It offers some of the benefits of incorporation (C or S corporations) and some of the benefits of sole proprietorships and partnerships. There are some drawbacks but perhaps the biggest benefit of the LLC business structure, is the flexibility it offers its owners. It provides the owners discretion over taxation and discretion over how formal, or informal, the owners wish to operate.
Similarities with corporate entities
Like incorporation, the biggest benefit of the LLC form is limited liability protection for the owners. The LLC is its own entity, separate from its owners, and the owners are protected from personal responsibility for company debts and obligations. This is in contrast to sole proprietorships, and some limited liability partnerships, where owners have personal liability for business debts.
Benefits over incorporation
Generally, there are less requirements in New Jersey to form an LLC entity versus incorporation. This benefits an owner looking to get their business up and running quickly, or an owner who forms a single-member LLC and doesn’t require all the formalities of incorporation. There are many requirements on corporations that are not required of LLCs, including:
Appointing a board of directors
Holding board meetings
Keeping minutes of board meetings
Holding shareholder meetings
None of this is required of LLCs under New Jersey limited liability law. However, many of those corporate requirements are rooted in good business sense. Although LLC members are not required to draft an operation agreement, which spells out the rights and obligations of the members, most do.
The LLC is very similar to the S corporation, but there are some restrictions on S corporation ownership that don’t apply to LLCs. S corporation ownership is restricted to no more than 100 shareholders, no foreign shareholders, and no corporate entity or partnership shareholders.
Like sole proprietorships, partnerships and S corporations, LLCs are typically taxed as pass-through income tax entities. That avoids the problem C corporations face with two levels of taxation, both at the corporate and personal levels. There are also some differences in income taxation between sole proprietorships, partnerships, and S corporations. S corporations are better able to avoid payment of self-employment tax versus partnerships and sole proprietorships. The LLC model gives owners the choice of being taxed as a sole proprietorship/partnership or an S corporation.
LLCs also offer members more flexibility in sharing profits. LLC members have discretion to pay dividends based on the proportion of ownership, or not, and divide profits in a different manner.
If a company plans to raise capital by admitting new owners or going public, a corporation is still thought best because LLCs generally restrict the transfer of ownership interests in the business. Also, an LLC usually has a limited existence in that it will end after a specified number of years or upon the occurrence of some specified event. For example, a LLC operating agreement states that if one member terminates their interest in the company it could force the LLC to dissolve.
Choice of entity for a new business is often one of the first, and most important decisions a new business will make. With all the pros and cons between the various legal entity forms, business owners would be wise to obtain advice on entity choice—tailored specific to their business—from a law firm or an experienced New Jersey business attorney who can explain the tax advantages, state fees, LLC formation and the best entity to protect your personal assets.