Ten myths about LLCs | Don't believe the hype. These new-kid-on-the-block business structures have pitfalls, too.
Limited liability companies have taken the business-legal world by storm over the past decade. In recent years, more businesses have chosen LLCs rather than corporations as their legal structure in Maine. But it is important to keep this revolution in perspective. The corporate-legal world evolves at a glacial pace. It’s easy to get excited about a new business entity when there hasn’t been much of anything new in more than 200 years. With all the excess exuberance, it’s important to sort out facts from hype.
1. Myth: Existing corporations should convert to LLCs. “My business is incorporated. I’ve heard I should convert to an LLC.”
Truth: In most cases, it will be expensive to convert, with little or no benefit in return. A conversion will usually require the assistance of both a lawyer and an accountant, and the conversion may trigger taxes that otherwise would not be owed.
2. Myth: LLCs are cutting edge. “I run a software business and I want to stay on the cutting edge with an LLC.”
Truth: LLCs do not provide advantages to all businesses. For instance, many employees in the tech industry are used to receiving stock options. But current tax regulations do not permit the use of stock options with LLCs — that form of compensation is available only to corporations.
3. Myth: Delaware LLCs are better than Maine LLCs. “Most of the multi-national businesses use Delaware LLCs. I want to form my LLC in Delaware to get the same advantages.”
Truth: Unless you are a Fortune 500 company or seeking major investors, there probably is no advantage to forming your LLC in Delaware. Fortune 500 companies like Delaware because its laws are well known to investors and they are willing to pay the extra price that goes with a Delaware entity. Most Maine businesses are better off forming an LLC in Maine.
4. Myth: LLCs are like corporations on steroids. “I don’t want to take chances with an old-fashioned corporation — I want all of the protections of a new LLC.”
Truth: LLCs provide no more protection than corporations. The primary difference is the tax treatment -- LLCs are typically taxed under the tax rules for partnerships, whereas corporations are taxed under a separate set of rules for corporations. Depending upon your business, you may pay fewer taxes as a corporation than an LLC.
5. Myth: Employees will benefit from owning a piece of an LLC. “I believe in employee-owned businesses and want to reward my employees with shares of the LLC.”
Truth: Making an employee a part-owner of an LLC will usually cause unintended problems. Once an employee holds an ownership stake in the LLC, they will have to start filing quarterly estimate tax returns and paying self-employment taxes. Because corporations operate under different tax rules, employees can own stock in a corporation without facing these same problems.
6. Myth: LLCs provide complete protection from liability. “I’ve heard that LLCs limit my liability. I don’t want to leave my house and savings at risk by using a corporation.”
Truth: LLCs provide no more protection from liability than corporations — both provide only limited protection. Even more protection is provided by business insurance, which you should carry whether you use an LLC or a corporation.
7. Myth: An LLC that elects to be treated as an S-Corp gets the best of both worlds. “I’ve heard that an LLC can elect to be treated as an S-Corp for tax purposes and have the best of both worlds.”
Truth: This is a recipe for having the worst of both worlds. The corporate tax code is incompatible with most LLC statutes. Don’t do it.
8. Myth: LLCs are expensive and complicated. “I have a small business but don’t want the expense and complication that come with forming an LLC.”
Truth: OK, this often is true. But particularly in the case of sole proprietorships, converting to an LLC can be done without much hassle since you can continue to file your taxes on the same forms you used as a sole proprietor.
9. Myth: Aside from the technicalities, LLCs and corporations are basically the same. “I’ve heard that LLCs and corporations are basically alike — you can flip a coin.”
Truth: If you consider the way taxes are calculated to be technicalities, then this may be true. LLCs are generally taxed under the partnership rules whereas corporations are taxed under the corporation rules. Sometimes this results in significant differences.
10.Myth: Corporations are dinosaurs; LLCs are the wave of the future. “Corporations are old-fashioned; I want to be on the wave of the future.”
Truth: LLCs and corporations are different and offer you a real choice. Don’t rule out corporations — they often remain the best choice depending upon your circumstances.
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Interesting reading, I can see this article was wrote back in 2008, now even more companies are LLC.
Take for example Portland https://mainecorporations.info/me/cumberland/portland almost half of the companies are LLC!
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