Corporations have existed in the United States for over two centuries making corporate law very well settled. The LLC has only existed in most states for less than 20 years. There are still many unanswered questions involving the LLC.
Frisco, TX (PRWEB) October 11, 2011
Business owners are as much as eight or ten times more likely to form an LLC rather than a corporation according to the latest filing statistics reported to the International Association of Commercial Adminstrators, an organization that collects this data from each state.
Choosing the wrong type of business entity, however, can be expensive. Should a business owner form an LLC or a corporation and does it really matter? Does an LLC offer more advantages than a corporation or are people simply choosing what's popular without understanding important disadvantages and limitations when forming an LLC?
According to Nationwide Incorporators, Inc., a national attorney-run online incorporation service, there are distinct advantages to operating a business through an LLC in certain situations, but there are also important disadvantages that many small business owners may not be considering.
Mike Ross, the attorney and CEO founder of Nationwide Incorporators, began forming corporations almost 40 years ago before any state statutes existed for forming an LLC. Ross says that the IACA data confirms the rising popularity of the LLC. “This data indicates that between 2004 and 2007, 45 states had more people form an LLC than a corporation. In a majority of states people chose an LLC over a corporation by a margin of at least 2 to 1 and in some states more than 80% preferred to form an LLC over a corporation” said Ross.
Some Perceived LLC Advantages Are Based on Misconceptions
Ross listed several commonly expressed LLC advantages. “First, it protects the personal assets of the owners from liability for business claims. It is also considered by many to be simpler and less expensive to form and operate than a corporation. And it offers greater flexibility in managing a business than a corporation.” Ross explained that there is more to each of these claims that are often overlooked.
Is LLC Asset Protection Better Than a Corporation?
According to Ross, it depends on the state where the LLC is formed. “Many states have statutes that protect the owners of an LLC from liability for any business claims. However, some states, like California, allow third party creditors to reach the personal assets of LLC owners just as they would if they were shareholders in a corporation.”
Ross explained a common misconception applies to both corporations and LLCs. “The biggest threat to a small business owner's personal assets usually comes from signing a personal guaranty for important transactions like bank loans, leases and vendor agreements. The owner's personal assets are at risk whether forming a corporation or LLC,” said Ross.
Is an LLC easier and less expensive to form than a corporation? “The cost to file a document to legally create either entity is not much different, but there's more to do. An LLC also requires a written operating agreement, which is like a partnership agreement, that is best prepared by an experienced attorney. This typically makes an LLC more expensive to properly form than a corporation,” according to Ross.
Ross has found the biggest misconception expressed by business owners is that corporations require meetings and other formalities that an LLC doesn't. Ross largely discounts this perception. “No state requires a small business corporation to ever hold any meetings to take action. Instead, simple 'written consent' minutes can be prepared and signed with very little time required.”
Many Unsettled Questions Still Plague the LLC
According to Ross, corporations have existed in the United States for over two centuries making corporate law very well settled. The LLC has only existed in most states for less than 20 years. “There are still many unanswered questions about forming a LLC involving personal liability protection, bankruptcy laws, title insurance and other real estate issues. It’s important that people get proper advice before selecting a type of business entity,” said Ross.
About Nationwide Incorporators
Nationwide Incorporators (http://www.nationwide-incorporators.com) is an online incorporation service providing complete, attorney-provided formation services in all 50 states for business corporations, professional corporations, nonprofit corporations and limited liability companies.