If you’re starting a business or beginning to toss the idea around, you have probably heard some version of the following statement: “what about an LLC?” You may have no clue what that means.

LLCs – or limited liability companies—have become the entity of choice for millions of American businesses. As you start your new business, one of the first things you must decide is the business structure. There are several different entities to choose from: sole proprietorship, partnership, corporation, limited liability company etc. Each different entity will have its benefits and disadvantages. This blog will solely focus on the increasingly popular limited liability company (“LLC”).

There are several reasons why LLCs continue to grow in popularity, so here are five benefits to forming an LLC:

  1. Limited Liability – General speaking, members are not personally liable for the actions of the company. A members’ personal assets are protected. Limited liability has its limits though, and members could be personally liable if a court rules that the LLC does not protect your personal assets. For example: if the LLC was formed to commit fraud. This topic could get a blogpost on its own.

  2. Tax Benefits - Forming an LLC provides business owners with the flexibility to elect how they wish to be taxed: as a corporation, sole proprietor, or as a partnership. When someone organizes an LLC, there are essentially two options to choose from for tax purposes:

    • Pass through taxation: the LLC itself will not be treated as a taxable entity, so the profits and losses of the business flow through the LLC to its owners. This may be advantageous for some business owners.
    • Corporate taxation: For this tax arrangement, you pay taxes at the corporation level, but you also still should worry about individual taxation. This, too, may be advantageous for some business owners.
    • Note: Taxation on LLCs will be different for single-member LLCs: Single-member LLCs, unless elected to be treated as a corporation or Subchapter S corporation, will be considered a “disregarded entity” and treated as a sole proprietorship for income tax purposes, i.e., profits and losses pass through to the owner.

  3. Simple and Inexpensive – At the beginning, an LLC can be inexpensive to form and get off the ground, depending on your particular situation, and the process is rather simple to form an LLC in Tennessee. The Secretary of State of Tennessee provides adequate information to get your business up and running.

  4. Flexibility on Management – Managing the LLC can also be quite simple: the Tennessee Revised Limited Liability Company Act (“RLLCA”) governs LLCs; however, LLC members may adopt operating agreements (basically a contract between the members) to control most aspects of the LLC’s business and management. Operating agreements can be very specific/ broad and give further flexibility to the management of the LLC, whereas the RLLCA may be more limiting.

  5. Do you need a lawyer to form my LLC? No, you do not. Individuals can form and organize the LLC themselves, but hiring a lawyer at the beginning, even if just to form the LLC, can save you the trouble of headaches and heartaches later down the road including, but limited to: figuring out how to be taxed; in which state to organize (since all 50 states have different laws); maybe you are selling your business to a larger group; maybe you experience a fallout with a business partner and don’t know how to move forward; etc. This blogpost only covers forming an LLC, so it may be prudent to talk with a lawyer and tax professionals about the year-to-year upkeep of your business.

    Additionally, an LLC may not be the best option for your business. Each situation is different, and although LLCs continue to grow in popularity, an attorney can help you weigh the benefits, consequences, and potential ramifications of forming your business.

About the Author: Patrick Morrison is an attorney with Grant, Konvalinka & Harrison, P.C. (“GKH”). Patrick is a native to the Chattanooga area and a graduate from Chattanooga School for the Arts and Sciences. Patrick graduated from Middle Tennessee State University in Murfreesboro, Tennessee and pursued his legal education at the University of Tennessee College of Law. Patrick is an experienced lawyer relating to contracts and business law. To learn more about Patrick or GKH, contact Patrick at 423-756-8400 or email him.

This blog is not intended to create an attorney/client relationship or provide legal advice. Please contact the author if you have any questions or comments regarding the subject matter.