When it comes to legally organizing or incorporating a business, you have several options. Some options are more appropriate than others, depending on your goals and how you want to handle liability, taxes, ownership, and other formalities. One of the most popular and flexible structures for small- and medium-sized businesses is the limited liability company, also known as an LLC. If you’re considering starting a business, a Springfield LLC attorney can advise you on whether an LLC is right for you and how to get started with one.

What Are LLCs?

LLCs are legal entities that combine the liability protections of corporations with the operational flexibility and tax advantages of sole proprietorships or partnerships. With sole proprietorships and partnerships, the proprietors or partners exercise complete control over the business’ operations, but they are personally liable for the business’ debts and obligations. With corporations, corporate officers enjoy broad liability protections, but are also subject to tighter regulations and limitations on how they can operate.

The key characteristics of LLCs are as follows:

• Ownership: The owners of LLCs are called “members,” and an LLC can have either one member or multiple members who each own a percentage of the business. LLCs do not issue stock.
• Governance: Instead of bylaws, LLCs operate via operating agreements, which set out formalities such as management structure, voting rights, profit and loss allocation, buyout and transfer rules, and dissolution.
• Taxation: By default, LLCs are taxed as either sole proprietorships or partnerships, depending on the number of members. Alternatively, an LLC can elect to be taxed as an S-corporation or even taxed as a C-corporation.
• Separate legal entity: LLCs are separate legal entities from their members, insulating their members’ personal assets from legal and financial liability in most cases.

LLCs differ from corporations in a few key ways. LLCs enjoy a flexible legal structure that allows their owners fairly broad control over their operations, while corporations typically have a more rigid structure with a board of directors and a suite of corporate officers. LLCs are owned by their members, while corporations are owned by shareholders who own stock. By default, LLCs use pass-through taxation, while corporations by default are subject to double taxation.

For more information about how LLCs work, including how they compare to other types of business structures, contact a Springfield LLC lawyer.

Pros and Cons of LLCs

LLCs offer several benefits, including:

• Low barrier to entry: Forming an LLC in Missouri is fairly simple and affordable (more on that below), with a filing fee as low as $50.
• Operational flexibility: Missouri law gives LLCs wide latitude to define their internal operations and, unlike corporations, they are not required to have a board of directors or hold periodic meetings. Members may choose to run the LLC themselves (member-managed LLCs) or appoint one or more “managers” to run it for them (manager-managed LLCs).
• Tax savings. By default, LLCs are treated as pass-through entities, meaning that members pay taxes on profits or losses via their personal tax returns, thus avoiding the double taxation of corporations (unless the members elect that structure).
• Liability protection: Because LLCs are separate legal entities, members generally are not personally liable for the LLC’s debts or other obligations.

Of course, LLCs also have a few notable drawbacks, such as:

• Self-employment tax exposure: If an LLC does not elect to be taxed as an S-corporation or C-corporation, its members must pay self-employment taxes on the LLC’s earnings.
• Less attractive to private equity investors: Private equity funds often cannot receive pass-through income due to the nature of the investors in the fund. As such, they typically prefer C-corporations over LLCs in order to avoid pass-through taxation. LLCs are also less attractive to venture capital investors because they do not issue stock, and private equity funds prefers to work with more clearly-defined stock issuance rules that allow common stock and multiple classes of preferred stock with specific voting rights.
• Complex ownership transfers: Membership interests typically are not transferable without the consent of all members unless otherwise specified in the LLC’s operating agreement. This can make business succession planning more difficult than with other types of business structures.
• Later conversion to corporation: LLCs are well-suited for small businesses, but as they grow and scale into large businesses, they may consider converting to a C-corporation, typically for investment purposes and for tax advantages. However, converting an LLC to a corporation can be challenging.

How to Start an LLC

The formalities of incorporating an LLC in Missouri are fairly straightforward. First, choose a name for your LLC that complies with the requirements of RSMo § 347.020. Second, choose a registered agent — i.e., an official point of contact for government agencies and individuals who want to get in touch with the LLC. Third, file articles of organization with the Missouri Secretary of State, which must comply with the requirements of RSMo § 347.039. After that, the fourth step is to create an operating agreement with clear terms as to how the LLC is to be operated. Finally, obtain an employer identification number (EIN) from the IRS.

While the nuts and bolts of LLC formation may not sound complicated, the real challenge is in the details. As we’ve noted, Missouri law gives LLCs wide latitude over their internal operations, which are contained in operating agreements. Errors, mistakes, and improper assumptions in an operating agreement can have serious consequences for the LLC and its members. That’s why it’s so crucial to work with a Missouri LLC formation attorney to ensure the long-term success of your business endeavor.

What You Can Do With an LLC

LLCs are a smart option for small- and medium-sized businesses looking for maximum flexibility and simplicity. In short, that means you can do almost anything with them — e.g., operating a brick-and-mortar business, holding real estate or investment property, and segregating personal and business liabilities while operating as an independent contractor. LLCs can also be used in estate planning, as assets placed in them are shielded from personal liability and can bypass probate if structured properly. Moreover, LLC operating agreements can be structured to ensure that even an individual’s interest in the LLC itself can pass outside of probate.

Get Your Business Off the Ground with Help from a Springfield LLC Attorney

If you’re considering forming your business as an LLC, you should seek experienced legal counsel to avoid potentially costly mistakes. To get started, please contact a Springfield LLC lawyer at the LifeGen Law Group by calling 417-823-9898 or using our online contact form.