LLCs are a popular means of business formation with good reason. While not perfect in all situations, this guide provides the 5 main reasons companies should consider organizing as an LLC. For situations where an LLC may not be ideal, see my guide entitled "5 Reasons to NOT Organize as an LLC."
Formation is Quick and Simple
While Articles of Organization must be filed with the Illinois Secretary of State, the process is relatively painless. The business owner should be prepared to answer some questions prior to organizing, including who the registered agent will be and whether the business will be “member managed” or “manager managed.” The owner will also need names and addresses for the agent, the organizer, and the members/managers (in small LLCs, these can all be the same person). The cost to file the Articles is $500.00 and there is an additional $100.00 fee for expedited filing. In LLCs with 2 or more members, an operating agreement should be entered into, but this is not a requirement and is not filed with the state. When the Articles are filed and approved by the state (a process that only takes about a day with expedited filing), the LLC becomes an official entity.
The Administrative Burdens Are Light
From a corporate governance standpoint, an LLC is not subject to nearly as many requirements as corporations. There is no necessity to have a board of directors and, therefore, resolutions and written consents are not necessary for company action. The only major on-going requirement is the filing of an annual report with the Secretary of State. This is an important step, however as a failure to timely file the report can be grounds for administrative dissolution.
Substantially fewer formalities are required to manage an LLC as opposed to a corporation. For example, an LLC can be managed by a “manager,” or by one or more “members.” It can provide for a board of directors and employ officers, similar to a corporation, or it can simply be run by its member(s) or manager(s). Distributions and allocations of profits and losses can be structured in different fashions in the operating agreement, as can the general operations of the business. There are also few restrictions placed on who may be an owner of the entity and owners may be active in the day-to-day operations of the business.
Limited Liability for Owners
As the name implies, an LLC structure provides its owners with limited liability meaning that, while the company itself is liable for lawsuits and debts, the individual members (owners) are not personally liable. While there is a way to “pierce the corporate veil,” most LLC owners can rest assured that their personal assets are safe regardless of what happens with the LLC.
Corporations are generally subject to what is known as “double taxation,” meaning they are taxed on the income they receive and then taxed, again, when paying dividends to shareholders. LLC’s, on the other hand, are considered “pass-through” entities, meaning that profits and losses are passed through to the owners and the LLC itself does not pay taxes on the gains, thereby avoiding double taxation. Of course, the owners pay taxes, but when their tax rates are lower than the corporate tax rate, they will enjoy tax savings. Furthermore, where the business expects to incur losses early in its existence, the members can claim the losses on their tax returns and obtain a personal tax benefit.