When you start your business, choosing the right business structure is one of the most crucial decisions you will make. The business structure is the government classification that regulates certain areas of your business. Several business structures are recognized in Phoenix, including sole proprietorships, partnerships, LLCs, and corporations. One of the most popular business structures in Phoenix is a limited liability company (LLC).
The business structure you choose has wide-ranging implications, from the daily operation of your business to its tax burden and liability protection. Let’s look at the LLC business structure.
What is an LLC?
An LLC is a business structure that offers the personal liability protection of corporations, but it is simpler and more flexible to form and operate. An LLC can have one owner (referred to as a “member”) or multiple members.
What are the Benefits of an LLC in Phoenix?
There are several benefits of classifying your business as an LLC in Phoenix. Three of the biggest benefits are outlined below.
- Personal liability protection
An LLC protects your personal assets (house, car, from business liabilities. If the LLC has debts, including liens and lawsuits, the creditors can only touch the business assets. The creditors cannot pursue the personal property of the business owner. Liability protection is not absolute and does not extend to illegal acts committed by the owners.
- Tax Flexibility
With LLCs, you can decide how you will be taxed. An LLC is not considered a distinct legal entity for income tax purposes. Commonly, they are taxed as either a sole proprietorship or partnership, depending on whether there are one or multiple members. The LLC owners report the business’s profits and losses on their personal income tax returns. This allows the owners to avoid double taxation. In contrast, with corporations, business profits are first taxed on the business level and then a second time on the personal level when distributed to the shareholders. With pass-through taxation, business members are required to pay self-employment tax.
LLC members can also choose to be taxed as a corporation. Members must select either an S-Corp or S-Corp classification. A lawyer can help you decide which tax classification makes the most sense for your situation.
- Simple to Form and Operate
LLCs do not need to follow the legal formalities that govern corporations. They are not required to hold annual shareholder meetings or follow recordkeeping requirements. LLC members can create an operating agreement that outlines how they will operate the business. Business owners can form an LLC in Phoenix by filing Articles of Organization with the Arizona Corporations Commission.
The LLC moniker at the end of a company’s name can add credibility to your business. Customers and lenders may see your business as more established and legitimate. The survival of your small business depends on consumer trust and credibility.
What are the Disadvantages of an LLC in Phoenix?
Below are some of the disadvantages of an LLC in Phoenix.
- Limited Life
An LLC has a shorter lifespan than other business structures. The LLC dissolves if a member dies, leaves the LLC, or declares bankruptcy.
- Lack of Management Structure
LLCs are given a lot of flexibility, but this can be a drawback as well as a benefit. There are no legal requirements regarding the management structure. For LLCs that do not create a comprehensive operating agreement, this can cause disorganization and confusion.
- More Expensive to Form Than Sole Proprietorship
Owners of an LLC must pay a $50 filing fee when submitting their Articles of Organization to the Arizona Corporations Commission. An expedited filing costs $85. In addition, the LLC owner must file a publication notice in a local newspaper for three weeks. The publication can cost anywhere from $60 to $300.
Is an LLC Right for My Phoenix Business?
There are many factors to consider when deciding whether an LLC is the right business structure for you. The above information is only a basic discussion of the pros and cons. The impact of forming an LLC will depend on your unique situation. A qualified business planning attorney can analyze your business and help you decide whether an LLC is right for your Phoenix business.
Your Phoenix Business Planning Attorney
Nicole Pavlik is an experienced Phoenix business planning attorney who can help you decide whether an LLC is the right structure for your business. If you have questions about forming an LLC, call Nicole Pavlik Law Firm today at (602) 635-6176 for a free consultation.