Why the LLC? Flexibility

Like most corporate/business lawyers, I'm often asked by entrepreneurs what sort of format they should use when forming a new business entity. Corporation? LLC? Limited partnership? S-Corp? It's often a difficult question to answer amidst the excitement and confusion of getting a business started. What's more, it's not a question with a simple answer. It's not as though one of the options is "good" and the others are "bad" - like most lawyers, I'm given to starting my answer with the words you don't want to hear: "it depends..."

In fairness it really does depend on your situation. But I know that's not really what you came to hear, so here's my answer: the LLC. And why? Because of the flexibility.

Here's the worst kept secret in corporate law. No one likes corporate maintenance (you know, Board minutes, shareholder resolutions, etc.) not even corporate lawyers. Actually, especially corporate lawyers. It's not particularly challenging work, and you're often doing it as cleanup - meaning because your client company hasn't kept up with it for the past few years. What's more, keeping track of shares of stock, with certificates, classes, etc., is not fun and it's not flexible. Corporations have been around for a long time, and most of the matters surrounding ownership, allocation of profits and losses, etc, have been well settled for years. That means your new business model is the square peg trying to fit into the corporate round hole.

The LLC is a much "looser" organization. Membership interests (the LLC version of stock) are simpler, easier to give, take and move around, and don't even have to be tied to the allocation of profits and losses. That's right. You can have a business that's 90% owned by someone who only gets 10% of the profits. Which is not to say that you don't need to make sure you keep your accountant in the loop when it's tax time, because you do (read this as, do not file your own business tax returns if you form an LLC!). But if you're bringing in minor investors who you don't want to give equity to, but who you still want to participate directly in the company's upside, or if you need specific ownership for compliance or special taxation matters, you need to be an LLC - those things are nearly impossible with a corporation.

Those types of business needs are much more common today than they've ever been - and that's why the LLC is a much more attractive structure than it's ever been. Of course, you should always talk to attorney if you can before making this decision - but unless you've got a list of questions that's going to require hours of research, you shouldn't have to pay much, if anything, for the advice.