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Entrepreneurship

13.4 Limited Liability Companies

Entrepreneurship13.4 Limited Liability Companies
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  1. Preface
  2. 1 The Entrepreneurial Perspective
    1. Introduction
    2. 1.1 Entrepreneurship Today
    3. 1.2 Entrepreneurial Vision and Goals
    4. 1.3 The Entrepreneurial Mindset
    5. Key Terms
    6. Summary
    7. Review Questions
    8. Discussion Questions
    9. Case Questions
    10. Suggested Resources
  3. 2 The Entrepreneurial Journey and Pathways
    1. Introduction
    2. 2.1 Overview of the Entrepreneurial Journey
    3. 2.2 The Process of Becoming an Entrepreneur
    4. 2.3 Entrepreneurial Pathways
    5. 2.4 Frameworks to Inform Your Entrepreneurial Path
    6. Key Terms
    7. Summary
    8. Review Questions
    9. Discussion Questions
    10. Case Questions
    11. Suggested Resources
  4. 3 The Ethical and Social Responsibilities of Entrepreneurs
    1. Introduction
    2. 3.1 Ethical and Legal Issues in Entrepreneurship
    3. 3.2 Corporate Social Responsibility and Social Entrepreneurship
    4. 3.3 Developing a Workplace Culture of Ethical Excellence and Accountability
    5. Key Terms
    6. Summary
    7. Review Questions
    8. Discussion Questions
    9. Case Questions
    10. Suggested Resources
  5. 4 Creativity, Innovation, and Invention
    1. Introduction
    2. 4.1 Tools for Creativity and Innovation
    3. 4.2 Creativity, Innovation, and Invention: How They Differ
    4. 4.3 Developing Ideas, Innovations, and Inventions
    5. Key Terms
    6. Summary
    7. Review Questions
    8. Discussion Questions
    9. Case Questions
    10. Suggested Resources
  6. 5 Identifying Entrepreneurial Opportunity
    1. Introduction
    2. 5.1 Entrepreneurial Opportunity
    3. 5.2 Researching Potential Business Opportunities
    4. 5.3 Competitive Analysis
    5. Key Terms
    6. Summary
    7. Review Questions
    8. Discussion Questions
    9. Case Questions
    10. Suggested Resources
  7. 6 Problem Solving and Need Recognition Techniques
    1. Introduction
    2. 6.1 Problem Solving to Find Entrepreneurial Solutions
    3. 6.2 Creative Problem-Solving Process
    4. 6.3 Design Thinking
    5. 6.4 Lean Processes
    6. Key Terms
    7. Summary
    8. Review Questions
    9. Discussion Questions
    10. Case Questions
    11. Suggested Resources
  8. 7 Telling Your Entrepreneurial Story and Pitching the Idea
    1. Introduction
    2. 7.1 Clarifying Your Vision, Mission, and Goals
    3. 7.2 Sharing Your Entrepreneurial Story
    4. 7.3 Developing Pitches for Various Audiences and Goals
    5. 7.4 Protecting Your Idea and Polishing the Pitch through Feedback
    6. 7.5 Reality Check: Contests and Competitions
    7. Key Terms
    8. Summary
    9. Review Questions
    10. Discussion Questions
    11. Case Questions
    12. Suggested Resources
  9. 8 Entrepreneurial Marketing and Sales
    1. Introduction
    2. 8.1 Entrepreneurial Marketing and the Marketing Mix
    3. 8.2 Market Research, Market Opportunity Recognition, and Target Market
    4. 8.3 Marketing Techniques and Tools for Entrepreneurs
    5. 8.4 Entrepreneurial Branding
    6. 8.5 Marketing Strategy and the Marketing Plan
    7. 8.6 Sales and Customer Service
    8. Key Terms
    9. Summary
    10. Review Questions
    11. Discussion Questions
    12. Case Questions
    13. Suggested Resources
  10. 9 Entrepreneurial Finance and Accounting
    1. Introduction
    2. 9.1 Overview of Entrepreneurial Finance and Accounting Strategies
    3. 9.2 Special Funding Strategies
    4. 9.3 Accounting Basics for Entrepreneurs
    5. 9.4 Developing Startup Financial Statements and Projections
    6. Key Terms
    7. Summary
    8. Review Questions
    9. Discussion Questions
    10. Case Questions
    11. Suggested Resources
  11. 10 Launch for Growth to Success
    1. Introduction
    2. 10.1 Launching the Imperfect Business: Lean Startup
    3. 10.2 Why Early Failure Can Lead to Success Later
    4. 10.3 The Challenging Truth about Business Ownership
    5. 10.4 Managing, Following, and Adjusting the Initial Plan
    6. 10.5 Growth: Signs, Pains, and Cautions
    7. Key Terms
    8. Summary
    9. Review Questions
    10. Discussion Questions
    11. Case Questions
    12. Suggested Resources
  12. 11 Business Model and Plan
    1. Introduction
    2. 11.1 Avoiding the “Field of Dreams” Approach
    3. 11.2 Designing the Business Model
    4. 11.3 Conducting a Feasibility Analysis
    5. 11.4 The Business Plan
    6. Key Terms
    7. Summary
    8. Review Questions
    9. Discussion Questions
    10. Case Questions
    11. Suggested Resources
  13. 12 Building Networks and Foundations
    1. Introduction
    2. 12.1 Building and Connecting to Networks
    3. 12.2 Building the Entrepreneurial Dream Team
    4. 12.3 Designing a Startup Operational Plan
    5. Key Terms
    6. Summary
    7. Review Questions
    8. Discussion Questions
    9. Case Questions
    10. Suggested Resources
  14. 13 Business Structure Options: Legal, Tax, and Risk Issues
    1. Introduction
    2. 13.1 Business Structures: Overview of Legal and Tax Considerations
    3. 13.2 Corporations
    4. 13.3 Partnerships and Joint Ventures
    5. 13.4 Limited Liability Companies
    6. 13.5 Sole Proprietorships
    7. 13.6 Additional Considerations: Capital Acquisition, Business Domicile, and Technology
    8. 13.7 Mitigating and Managing Risks
    9. Key Terms
    10. Summary
    11. Review Questions
    12. Discussion Questions
    13. Case Questions
    14. Suggested Resources
  15. 14 Fundamentals of Resource Planning
    1. Introduction
    2. 14.1 Types of Resources
    3. 14.2 Using the PEST Framework to Assess Resource Needs
    4. 14.3 Managing Resources over the Venture Life Cycle
    5. Key Terms
    6. Summary
    7. Review Questions
    8. Discussion Questions
    9. Case Questions
    10. Suggested Resources
  16. 15 Next Steps
    1. Introduction
    2. 15.1 Launching Your Venture
    3. 15.2 Making Difficult Business Decisions in Response to Challenges
    4. 15.3 Seeking Help or Support
    5. 15.4 Now What? Serving as a Mentor, Consultant, or Champion
    6. 15.5 Reflections: Documenting the Journey
    7. Key Terms
    8. Summary
    9. Review Questions
    10. Discussion Questions
    11. Case Questions
    12. Suggested Resources
  17. A | Suggested Resources
  18. Index

Learning Objectives

By the end of this section, you will be able to:

  • Describe the ownership structure of a limited liability company
  • Explain how limited liability companies are taxed
  • Summarize the advantages and disadvantages of the limited liability company structure

A limited liability company is a hybrid of a corporation and a partnership that limits the owner’s liability. The big advantage that LLCs have over GPs is in the protection of owners from personal liability. Thus, an LLC is similar to a corporation in that it offers owners limited liability.

The advantage that LLCs have when compared to corporations, especially for entrepreneurs, is that they are easier to form and less cumbersome to operate because there are fewer regulations and laws governing LLC operations. Although LLCs tend to be easier to create, they still require a filing of articles of formation with the state and the creation of an operating agreement. Owners of an LLC can be individuals and other business entities. The entrepreneur can use the flexibility of an LLC to create a business structure suitable to the operational and tax needs of the business.

In 1977, Wyoming was the first state to allow the LLC format—most states started allowing them in the early 1990s. In contrast, corporations have been around since the early nineteenth century. LLCs now significantly outnumber corporations, with some estimates indicating that four times as many LLCs are formed as corporations,16 with the total number of LLCs nearing 20 million compared to about 2 million corporations. Each state may permit varying types of LLCs, with different types of formation agreements and operating agreements.

When evaluating the use of an LLC as the structure for your business, it is important to know that there are some constraints on the use of an LLC. In most states, a nonprofit business cannot be an LLC. Additionally, most states do not permit banks or insurance companies to operate as LLCs.

Overview of LLCs

The owners of an LLC are called members. The owner (if a single-member LLC) or owners often run the company themselves. These are called member-managed LLCs. The daily operations of the LLC can also be delegated to a professional manager, which is called a manager-managed LLC. If the original organizer of the LLC chooses, they can organize an LLC in which the owners (members) will have little or no management responsibility because it has been delegated to a professional manager. These options when drafting an LLC’s operating agreement allow an LLC to operate in different ways, so that an entrepreneur can develop a business structure best suited to the needs of the business.

As long as the members (owners) do not use the LLC as an alter ego and/or commingle personal funds with LLC funds, the LLC provides the corporate shield of limited liability to the investors. If the LLC is operated to protect a sole proprietor, this might become an issue if the sole proprietor commingles funds. Commingling funds or assets gives rise to the sole proprietor or other members of a multi-owner LLC being liable for all of the debts of the LLC. Generally, the ownership of an LLC is represented by percentages or units. The term shares is not used in operating agreements because LLCs cannot sell shares of stock like a corporation can; thus, owners are not technically shareholders.

Taxation of LLCs

Entrepreneurs are able to make decisions regarding the taxation of LLCs. The government can tax the business as a corporation or as an individual. This choice may involve more than simply a tax rate decision; it might involve ownership and management issues, as well other financial considerations. However, this section will focus on the tax decision aspect of the issue.

A multi-owner LLC’s default taxation is as a partnership, meaning profits pass through and are taxed on the owner’s federal tax return. However, LLCs can elect to be taxed as either a partnership or a corporation. Single-member LLCs can also be taxed as a sole proprietorship or as a corporation. The fact that an LLC can select its method of taxation as either a C corporation, S corporation, or partnership allows the entrepreneur flexibility in creating the business structure of their choosing. Note, however, that tax laws change. For example, the Tax Cuts and Jobs Act of 2017 may make formation as an S corporation more attractive to some entrepreneurs than formation as an LLC, at least as far as taxation is concerned. You should seek advice from a tax accountant to ensure that you are able to make decisions based on the most current regulations.

Footnotes

  • 16 Scott A. Hodge. “The U.S. Has More Individually Owned Businesses Than Corporations.” Tax Foundation. January 13, 2014. https://taxfoundation.org/us-has-more-individually-owned-businesses-corporations/
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