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A question many entrepreneurs have when starting a company is how they should structure it.
For example, here’s a list of some of the most popular business organizations you can form in Texas:
- Sole Proprietorship
- General Partnership
- Limited Liability Company (LLC)
- Professional Limited Liability Company (PLLC)
- Limited Partnership (LP)
- Limited Liability Partnership (LLP)
- Corporation (Inc)
- Professional Corporation (PC)
f all these types of organizations, the LLC is your best option if you own a small to medium-sized business.
Now, you may be wondering if the other organizations, like the LLP or LP, are better or more sophisticated than the LLC. We hear about the LLC all the time – are the others better options?
The answer is, for the vast majority of businesses, probably not.
While a corporation may have some distinct advantages over an LLC, particularly for large businesses, it is my opinion that the LLC is a better option than any other business organization for most every type of business.
And here’s why. It comes down to three factors:
- Liability Protection
- Low Costs and Ease of Administration
- Flexibility
1. Liability Protection
As you probably know, LLC stands for Limited Liability Company. Limited Liability means that only the assets owned by the LLC are at risk in the event your business is the subject of a lawsuit or owes money to a creditor.
Simply put, a well-run LLC puts a wall up between your personal assets and the assets of your business in the event of business bankruptcy or a costly lawsuit. It limits the ability for creditors to only take the personal assets of your business.
Now, the keyword is “well-run” – for that protective, limited-liability wall to exist between your personal assets and those of your business, you need to build it. Meaning, if you don’t treat the LLC like a separate entity from yourself, you could end up “piercing the corporate veil” and lose your liability protection.
Generally, you build your limited liability wall by having both:
- Proper LLC administration practices;
- and a proper operating agreement.
This means doing things like:
- Treating the LLC like a separate entity from yourself.
- Operating separate personal and business bank accounts.
- Drawing a salary (having the LLC pay you).
- Formally funding the LLC with assets.
- Having a clear account of the flow of funds and assets.
- And more.
Now, that’s a separate article – but this ties in directly to why the LLC is better than most other business organizations.
Neither the sole proprietorship or the general partnership provide you with limited liability protection, full-stop.
And an LP has separate classes of limited liability, between limited partners and general partners. The general partners, who are usually business owners and managers, do face liability in lawsuits and will owe personal assets to creditors.
An LLP provides general partners with limited liability but cannot be formed by a solo operator. LLPs also cost more upfront to form than an LLC.
Finally, while a corporation provides you with LLC-levels of protection, they have high administrative costs, which brings us to point number two.
2. Low Costs and Ease of Administration
LLCs have low formation costs. And while a sole proprietorship and general partnerships cost nothing to form, they provide no liability protection, creating huge downside in the event of a lawsuit.
Forming an LLC in Texas can cost as little as just the $250 state filing fee. In contrast, other types of businesses, like LPs, LLPs, and corporations have higher filing fees.
In addition, an LLC has only one major document – the operating agreement. The operating agreement serves as the internal “constitution” to how the LLC operates. The operating agreement helps build the limited-liability protection afforded to the LLC.
Taxes are simplified with an LLC, which can be taxed like a sole proprietorship (for one-person companies) or a partnership.
In contrast, a corporation has bylaws, shareholder agreements, meeting minutes, and in general, a much more complicated administrative, tax, and regulatory burden.
This directly ties into the third factor.
3. Flexibility
LLCs can have multiple members, like a corporation or partnership, but all of the rules governing the members and their percentage shares can be contained in the operating agreement.
Thus, a company can scale pretty well just by changing the operating agreement to accommodate new investors, partners, and the goals of the business.
In other words, an LLC allows you to add members (with no limit) and customize the way the business operates.
You can do the same with an LLP or an LP, but it’s tough to justify why. You can accomplish the same goal with an LLC and a well-drafted operating agreement. Even attorneys, doctors, and accountants have access to the PLLC business organization, aka the Professional Limited Liability Company.
As a quick note, the PLLC is just a version of the LLC for licensed professionals, like accountants, lawyers, doctors, and architects. Often, ethics rules prohibit licensed professionals from sharing profits with individuals who are not licensed professionals as well.
Conclusion
With all this in mind, the LLC is probably your best option when starting a company or converting from a sole proprietorship or partnership. You have all the benefits of limited liability protection without the high admin or formation costs of other business organizations.
If you wish to form an LLC, Greenline Law PLLC is here to help you. We can register it for you with the Secretary of State, as well as provide you with a quality operating agreement. We provide additional legal counsel and services to make sure your LLC maintains its limited liability. Check out our LLC package.
Now, I believe that forming a corporation can also be beneficial to particular businesses. You can see the benefits of corporations in this article.