When forming a new company, and trying to decide what kind of legal entity is best (corporation, LLC or partnership), most people focus on tax and liability considerations. And that’s the right thing to do.
But one thing many people overlook is how the company’s management will be affected by their choice.
This is where LLCs offer the greatest advantage over corporations and partnerships.
There are many more legal restrictions on corporations and partnerships, both when it comes to how the company must be managed and on the rights of its owners.
This contrast is especially pronounced with partnerships, where there are general partners and limited partners. General partners have an equal right to manage the business, regardless of how much they’ve contributed, but the limited partners have no right to manage the business, they’re just silent investors.
Compare that will LLCs: the owners (called members) have a lot more flexibility. They can decide on the rules: how they themselves will be governed and how the company will be managed. They can decide that all members will manage the LLC or that only certain members will, or they can even decide to delegate the management to non-members. They can also decide to allocate profits and losses in a way that best suits their needs, which may or may not be based on how much each member contributed.
This is a big reason why LLCs have become such a popular choice of legal entity. LLCs offer legal liability protection like corporations, with less formalities than corporations and the most flexibility in how the company is managed and taxed.
Before deciding on what kind of legal entity to form, talk to your CPA about taxes first. Then give me a call to walk through the legal considerations.