Loudonville, Ohio                  

NOTICE: THIS DOCUMENT IS INTENDED TO OFFER GENERAL INFORMATION REGARDING LEGAL ISSUES. IT DOES NOT CONSTITUTE LEGAL ADVICE. READERS ARE ENCOURAGED TO CONSULT AN ATTORNEY FOR LEGAL ADVICE IN LIGHT OF THEIR OWN CIRCUMSTANCES.

Could a Limited Liability Company (LLC) be good for your business, farm, or rental property?

            In recent years the Limited Liability Company (LLC) has become a very popular entity under which to run a business. An LLC can be an inexpensive and powerful method of protecting the person(s) running the business from liability while still offering a significant tax benefit. In order to understand these benefits, one needs to have a basic understanding of two other types of business entities.

            First, we can look at what we will term the Unincorporated Entities (UE). These generally are business entities such as the Sole Proprietor (where an individual simply starts a business with no formal structure) and the Partnership (where two or more persons are associated with each other to carry on a business). These are simple and flexible ways to carry on a business. The problem that exists, however, is that if the business faced liability (for example, a lawsuit for damages that arose from the business to a third party, or liability for a contract dispute) these people (the individuals involved) could be held personally liable. That is, they may be personally responsible for the debts of the business.

            To avoid such personal liability many businesses have become Corporations. Generally speaking, a Corporation protects the shareholders from liability. The debts and liabilities of the Corporation stay with that Corporation (there are a few legal exceptions to this).  So, if the Corporation were sued the assets of the individuals who own the stock in that Corporation would be protected. They do not have to worry about a liability costing them personally. It could only cost the Corporation.

            While that is attractive to most business owners, Corporations have a draw back. Most Corporations have their earnings taxed when the Corporation makes the money and the money is again taxed when the shareholder is paid. This “double taxation” can create a significant burden. (While it is beyond the scope of this document, it should be noted that some Corporate forms and setups can protect against unfavorable tax treatments – such as S Corps).

            The answer that has been developed by many states (including Ohio) is the Limited Liability Company (LLC). The LLC allows the “Members” to have the business and run it, but only the LLC is responsible for any liabilities that arise. So the limited liability feature of the Corporation exists. At the same time, Members of the LLC can elect to be taxed only as individuals. So they can avoid the double-taxation problems that exist.

            The LLC offers the “best of both worlds” in terms of business entities. It is a flexible and powerful method of protecting your personal assets if you have fear of business liabilities and yet if offers you the tax benefits that Corporations usually take away.

            While we feel that the LLC entity can be very beneficial to a person or a group of people wishing to start a business, it should be noted that it is not necessary for everyone. Many small businesses believe they are insured in a manner that would protect them from any liability they may see. They do not wish to have an LLC because they feel their insurance will protect them. This may be true. However, taking this approach leaves the individuals open to the possibility that their insurance is not sufficient. Liabilities above the insurance amount may still seek satisfaction from the personal assets of the individuals involved.

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