Limited Liability Companies

LIMITED LIABILITY COMPANIES

Question:  My sister and I are negotiating to buy an established beauty salon, but we’re not sure what legal entity we should use to operate the business. My husband mentioned that a friend of his formed an LLC for his new business.  What are the advantages to forming an LLC?  How does one going about doing that?  And can we do it ourselves, that is, without a lawyer, in order to save money?  Thanks very much.  Roberta G.

Answer: We’d have to have more facts, Roberta, before giving you specific legal advice about your choice of business entity, but let’s start with the general notion that it is not good business to go into business in your own name (a single proprietorship.)  If your business fails, you could lose your personal assets.  The law permits people to form various types of legal entities to insulate their personal wealth from their business investments.  Those entities include corporations, partnerships, limited liability companies (LLCs), and others.  An LLC combines some of the benefits of corporations and partnerships.  For example, an owner of an LLC (known as a “member”) is not personally liable for ordinary business debts unless she or he personally guarantees an obligation or signs a contract in her or his own name (taxes excluded.)  A member of an LLC does not have to be a citizen or a permanent resident.  An LLC, unlike a corporation, does not have to meet certain administrative requirements such as holding annual meetings, recording minutes of the meeting, electing board of directors/officers, filing annual reports and so on.  And, tax laws generally allow members of an LLC to report company profits and losses on their individual tax returns, so as to avoid double-taxation.  We strongly advise our clients who ask us to form LLCs for them to speak to their accountant as there are tax issues that must be considered.

As to your question about doing it yourself, we have seen situations where clients who tried to set up LLCs on their own, ran into major problems.  While an LLC, when properly formed, affords you immunity from personal liability while avoiding double taxation, there are certain requirements which must be followed.  For example, when forming an LLC, you must advertise or publish that fact in a newspaper in accordance with the laws of New York State.  Failure to follow the strict provisions of the statute may result in the loss of immunity for members of the LLC.  An Operating Agreement should also be prepared which will govern the management of the LLC and protect its members regarding matters such as the attempted sale by a member, death of a member, and the like.  It is clearly important to get legal advice to take full advantage of the benefits of the LLC.  The old adage “penny-wise; pound foolish” has, sadly, applied to many people in these circumstances.

As always, if you have further questions, or would like to discuss the purchase or sale of a business, please feel free to contact us.

 

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