Limited Liability Companies present unique opportunities not available in partnerships and corporations for business continuity and succession planning here are some of the key advantages and distinctions.
Introduction
For small business owners, a number of factors come into play in deciding what type of entity to choose for conducting their business. Entity choice is often one of the key initial decisions a business owner must make. Often, this is a critical decision that must be made before the first goods are manufactured and sold, or the first services are provided to patrons or clients. In order to make the proper entity choice, the business owner must consider a number of non-tax and tax factors. In terms of the non-tax considerations that come to mind, four primary considerations affect the calculus of entity choice:
- risk and liability issues;
- capital formation and financing options;
- governance and control of the entity; and
- continuity and succession planning.
There are primarily four main choices to pick from in operating a business and choosing an entity:
- a sole proprietorship;
- a partnership (whether general or with limited liability);
- a corporation (whether a subchapter C or S corporation); and
- a limited liability company.
The decision to choose one of these types of entities over another creates a whole host of considerations geared around liability and risk aversion, capital formation, governance and control, and continuity and succession. Especially, for small business owners, these core considerations are highly magnified and take on great significance. As their small businesses succeed and grow, becoming large businesses, business owners and key executives/employees become most worried and concerned about disability and incapacity planning, retirement, and death. Certainly, where business owners and key executives/employees are concerned, disability, incapacity, retirement, and death can ravage and destroy even the best businesses virtually overnight.
Limited Liability Companies
Sole proprietorships, partnerships, and corporations all address the issues of risk and liability, capital formation and financing, governance and control, and continuity and succession in varying ways. Indeed, sole proprietorships and partnerships (particularly general partnerships) generally are not the best choices where business owners run a high risk of being sued as they do not shield their owners from personal liability. Corporations are excellent in high-risk situations where owners seek limited liability. Sole proprietorships and general partnerships are limited in capital formation and financing by their owners creditworthiness. Corporations allow greater options for capital formation through the sale of shares of stock and other equity. Sole proprietorships and general partnerships allow for direct control and management by owners. Corporations are formal and bureaucratic in that officers and agents have to answer to shareholders and boards of directors. Sole proprietorships and general partnerships die and cease to exist when their owners die. Corporations are advantageous in that they have perpetual life and existence.
In the not so distant past, those wishing to start a business essentially had only three options for the form of that business sole proprietorship, general partnership, or corporation. As demonstrated, each of these business types brought with it a number of factors to be weighed and considered when viewing risk and liability, ease of capital formation, internal control and governance, and continuity. There existed very little room for the proverbial happy medium. However, in the 1970s, this changed when Wyoming enacted the first limited liability company (LLC) statute, creating a business form that blended features of sole proprietorships, general partnerships, and corporations. Essentially, LLCs are hybrid entities that limit personal liability, have equity features like corporations that assist in capital formation, provide flexibility in governance and control structure, and exhibit almost unlimited life and duration. Currently, all fifty states and the District of Columbia have LLC statutes in place. LLCs are formed quite easily through filings of forms with the appropriate state official, usually the Secretary of State.
