Pros and Cons of LLC's

[In the Corn]

I keep hearing everyone I talk to suggest that I should set up an LCC for any self-employment. I know very little about them...why do it, what it takes. I'm looking for opinions and advice.

[revo]

The biggest Pro is that you have the Limited Liability protection of any personal assets in case someone were to sue you. Only the assets of the LLC are in play. If you're going to buy your own health insurance, being the "elected manager" of an LLC will allow you to deduct health insurance premiums 100%.

The negatives are that you have to pay a fee to set it up; you have to do taxes on the entity every year; and some states have special taxes on LLCs.

What kind of business are you going to run? Is it one where you can potentially get sued? Do you pay for your own health insurance?

[SenorSmoke]

We set up an LLC for our dev and consulting business many years ago primarily for the reason revo listed: protection of personal assets. Plus it makes creating a partnership easy. I'm pretty sure they are still the recommended option for a lot of small businesses (there are certainly exceptions). It was very easy to set-up, trivial filing fee(s), and quick. We involved a lawyer to draw up a partnership agreement covering things like dissolving of assets, partner shares, etc. It is very flexible. We pay about $300 extra per year to get our business taxes done but they are generally very simple.

[Lucky]

I was one of the first lawyers setting up LLCs in Arkansas, following our enabling legislation which became effective in 1993. I was already familiar with them, since I had practiced the previous three years in Texas.

In my opinion they are good for the self-employed, but not great. What I loved them for was protecting clients from high-risk passive income properties, like working interests in oil and gas wells.

One reason they are not great for the self-employed is that they don't provide any asset protection or liability avoidance for things that you do. It protects you when your employees screw up, but if you are negligent in some way you can still be sued individually.

As for potential tax advantages, I always sent clients to see their accountants. Asset protection and tax benefits are two completely different animals.

Senor, I assume that what you mean about creating a partnership being easy refers to just selling someone else an interest in the LLC? True, to an extent, but you still need the LLC to have the necessary language to protect you in the event of death of the other member or other act of dissolution. Just like in a partnership, there should be explicit agreements regarding death, bankruptcy, divorce, prison, and other things that could break up the partnership. To the extent that insurance is used to fund buyouts, there might be tax advantages...again, that is one for the accountant.

In reality, I have probably wound up not doing LLCs for a majority of self-employed people, urging them to spend their money instead on liability insurance premiums. (And I don't sell insurance.)

But, ITC, the best answer (as with most legal questions) is to go talk to an attorney. Find one who is competent in business organizations and see if an LLC will help you. Some lawyers still do free consultations, but it might cost you $100 to $200 and be well worth it. If you decide to go with an LLC, he/she might apply the initial consultation fee to the final bill. Be sure you ask up front how much everything is going to cost.

Lastly, I have historically advised my client strongly against the "corporation in a box" approach to creating LLCs or other similar organizations. I don't know if Bob Shapiro's company customizes by state, or whether they stand behind their products.

[chancellor]

Lucky's points are good, and I'll add only that the protection a person receives with a LLC varies from state to state.

[In the Corn]

What kind of business are you going to run? Is it one where you can potentially get sued? Do you pay for your own health insurance?

I'm looking to potentially do some nonprofit fundraising consulting, as well as some independent contract sales work. I currently have two part-time job...one as the Youth Director at my church and the other as the Executive Director for my local Meals on Wheels. Neither provides health insurance, so I'll have to at some point purchase insurance for the family.

My understanding is I can have money earned placed into the LLC and then only draw a salary when I need to. I'm sure that is an oversimplification, but that's what I have been told.

And, yes I'll definitely look to consult an attorney if and when I think this needs to happen.