The Top 6 Things You Should Know About LLCs

Last week, we launched a new Limited Liability Company (LLC) incorporation offering on the Founder’s Workbench Document Driver. To help founders evaluate potential use of the LLC structure, we’ve outlined below the top things they need to know about LLCs. We’ll take a deeper diver into these issues in additional posts in the coming weeks.

Here’s a quick list of what you should know about LLCs:

  1. LLCs are similar to corporations in that they shield the owners of the LLC from the liabilities and obligations of the LLC in generally the same manner, and generally to the same extent, that corporations do.

  2. LLCs offer a lot more flexibility and creativity than corporations around matters such as governance and sharing of proceeds, so more “unique” business arrangements can be implemented among founders and founders and investors utilizing an LLC.

  3. Because LLCs offer more flexibility and creativity, they tend to be more expensive to establish and operate from a legal, tax and accounting perspective. To help manage the incremental costs, our LLC offering in the Document Driver has a fairly standard set of terms that are generally in line with those that would apply to a corporation being formed using the Document Driver.

  4. There are a number of tax benefits associated with using an LLC over a corporation. These include “single level” taxation, the ability of founders to get a step-up in basis for undistributed retained earnings in the business, and the ability to deliver certain tax benefits to a buyer in connection with a sale event.

  5. LLCs can grant “profits interests” which are a form of equity incentive (like stock options) that have certain tax advantages to the grantees.  However, the use of profits interests can create additional complexities and costs.

  6. Many venture capital and private equity funds have certain restrictions on them that limit their ability to invest in LLCs. That said, it is typically fairly “easy” to convert an LLC into a corporation if necessary, but there are often challenges (usually tax related) in moving from a corporation to an LLC once a business is up and running and starting to create value.

Stay tuned for more “need to know” posts on LLCs!

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