Business owners who operate socially conscious businesses have a new tool in their arsenal. Benefit LLCs are a type of limited liability company that allows business owners to further their companies’ social and environmental goals.
Like traditional LLCs, benefit LLCs give business owners the same protection from personal liability for business debts and obligations, with some added benefits.
Traditional LLCs
A Limited Liability Company is a business structure that allows owners to limit their liability. One or more persons can own an LLC with an unlimited number of members.
A Limited Liability Company can be taxed as a sole proprietorship, partnership, or corporation, depending on how its income is reported.
Benefit LLCs vs. traditional LLCs
Benefit LLCs are new business entities that provide social benefits instead of financial ones.
Unlike traditional limited liability companies (LLCs), they do not require an operating agreement or state filing fees. They don’t pay taxes on profits because they are not required to distribute those profits to their owners.
Instead, benefit LLCs use their money to provide charitable donations or other community-building support.
Here’s how it works: The owner(s) of a benefit LLC can set up any public charities under their ownership umbrella, each dedicated to helping solve some particular issue or cause.
Then deposit all profits from their business into these nonprofit organizations each year instead of paying taxes on those earnings at the personal level like most businesses would do today.
What are the advantages of forming a benefit LLC?
Benefit LLCs offer many advantages to socially conscious business owners. The most important of these is that they’re exempt from paying state and federal income taxes.
In addition, benefit LLCs are more flexible regarding how members distribute profits. You have a choice whether or not you want your company to be classified as a partnership, corporation, or sole proprietorship.
Another benefit that’s unique to LLCs: they require less paperwork than traditional corporations do because there are no requirements for having a board of directors or an operating agreement.
In most states, forming a benefit LLC costs less than $100. The most significant disadvantage of creating a benefit LLC is that it may not be appropriate for all businesses.
If you want to raise capital from investors or sell your company, then a benefit LLC probably won’t be a good fit.
Other drawbacks include that benefit LLCs are more difficult to dissolve than traditional corporations and must file annual reports with state authorities.
Disadvantages of forming a benefit LLC
There are some disadvantages to forming a benefit LLC. For one thing, it may be more expensive to create than other types of businesses.
This is because you have to pay extra fees for the privilege of operating under a special legal designation and because there aren’t as many lawyers who specialize in benefit LLCs as there are generalist attorneys.
Second, you may find it harder to attract investors who want nothing more than profits and are not interested in helping society at large.
Thirdly, if your business doesn’t fit into one or both categories above, for example, if it sells socially conscious products but doesn’t provide any charitable services, then forming a benefit LLC might not make sense for your situation.
Finally: You can’t use the word “coop” in your business name unless its members own it; otherwise, it will be considered misleading advertising by consumers unfamiliar with cooperative principles.
The takeaway: While benefit LLCs aren’t for everyone, they can be an excellent choice for businesses that want to give back to the community while still making money.
Where can a benefit LLC be formed?
Benefit LLCs can be formed in any state. Some states, however, have a reputation for being more socially conscious than others.
Delaware has been called the “most popular state for business formation.” People often think Delaware’s laws are suitable for businesses because they are straightforward to understand.
However, Delaware does not have any requirements specific to LLCs that would make it more attractive than other states where you can form your company.
New York recently passed legislation encouraging socially responsible investing practices by publicly traded companies doing business in their state.
This is regarded as a move with potentially far-reaching implications for how we think about money management and corporate governance.
California is known for having some of the strictest worker protection laws in America if you’re worried about worker rights violations by your business partners or suppliers.
This could be important when deciding where to establish yourself as an entrepreneur legally.
Maryland offers tax credits geared explicitly toward businesses working toward green energy goals; it may be worth researching whether these incentives apply before choosing where to form your legal entity.
Hawaii has similar benefits, but the maximum taxable income that eligible companies can make is capped at $100,000 per year instead of the current $250,000 per year.
Delaware’s statutory public benefit LLC law
Delaware’s public benefit LLC law is a powerful tool for business owners who want to form a benefit corporation. Delaware is one of the most popular states for incorporation, so it makes sense that it would have such a law in place.
In addition to providing flexibility in terms of social responsibility requirements, this type of business structure also comes with some other benefits, including:
You have a choice on whether or not you want your company to be taxed as an S corporation or a C corporation.
This gives you more control over how much your taxes will be at the end of each year and helps you avoid some tax pitfalls associated with certain types of businesses.
You follow specific guidelines explicitly related to Delaware’s statutory public benefit LLC law, including ensuring all members agree about what qualifies.
Conclusion
Benefit LLCs are an excellent option for business owners who want to impact society positively.
They allow you to donate part or all of your profits to charity while keeping your assets safe. Contact us today if you’re interested in learning more about this type of entity.