I’ve noticed in the last few years, a lot of small travel agencies forming LLC’s, and I have to chuckle to myself. For those of you who don’t know, LLC means Limited Liability Company, and is a hybrid between a Sole Proprietor/Partnership and a Corporation. While it has its place in very limited circumstances, it is most likely NOT the best formation strategy in our business. If two or three people get together to form a travel agency, doing business in one state, for a limited time, and are absolutely sure they never want to grow the business – the LLC might be the way to go.
The people who recommend LLC filings generally point to two advantages: Liability and Taxation. As a young man in law school, I did a bit of legal clerking for various lawyers around town. One of my most common tasks was writing interrogatories to “pierce the corporate veil” when the defendant was an LLC or an S Corporation. I don’t believe any attorney has ever failed to hold the owner/s of such an entity personally liable, if they wanted to. So, really, if you are looking to avoid personal liability, fuggetaboudit. The best way to protect your assets is simple liability insurance. If you have significant personal assets, talk to a lawyer about setting up a trust, or buy more insurance. It is inconceivable that a travel agency could make a single mistake that would expose them to over a million dollars in liability. A million dollars in liability insurance costs less than setting up an LLC. If you do things like full ship charters where you might be dealing with numbers bigger than that, get event insurance. Again, ten million in event insurance is a pittance compared to your profit on the event, and should be a standard expense for such an endeavor.
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The other thing the pro-LLC people talk about is taxation. You see, an LLC, just like a partnership or sole proprietorship, doesn’t pay taxes. The owners claim the profits on their personal tax returns–which means they have to pay self-employment tax on the profits. And, a weird thing about LLC’s is that each owner has to claim their share of the income, whether they actually took the money out, or not. So, as a vehicle for building up capital for expansion, it is less than useless. An LLC actively discourages saving and investment.
And the biggest problem with LLCs is that they are relatively new, legally speaking. Corporations and Sole Proprietors/Partnerships have been around for centuries, and the law is generally settled and pretty consistent from state to state. The laws governing LLCs still vary widely from state to state. Since most travel agencies “conduct business” in many states, even the most diligent agency owner is going to have a hard time keeping in compliance. As far as I am concerned, I have enough trouble keeping track of just the seller of travel laws in a half dozen states. I have no interest in mastering the tax and other laws of all 50.
David Holman is a Partner at Bridges & Holman Worldwide Travel, The Mobile Agent Host. He has been in the travel business since 2005, and the author of “Live From…Cruise Ship Reviews” and “Top 8 Cities in America”, both available on Amazon. www.holmantravel.com