A limited liability company (LLC) has many pros and cons for entrepreneurs or aspiring business owners. An LLC combines the desirable aspects of a partnership, such as flexibility, simplicity, and tax advantages, with the protection from liability that a corporation has.
If you’re thinking of forming a business, you could consider an LLC. But first, it may be wise to assess the pros and cons. This article could be a great starting point.
About LLCs
A limited liability company is a business with a corporate structure designed to protect the owners from being personally answerable for its liabilities and debts. The laws and regulations governing LLCs may vary depending on the state. But generally, LLCs don’t directly pay taxes on their profits. Their profits or losses are reported through their owners, who pay through individual returns.
The Pros Of An LLC
Registering your business as an LLC has a fair share of advantages. And here are some of them.
- It’s Easy To Start And Run
Despite the slight variances in state fees and requirements, the initial paperwork filing for registering an LLC is relatively easy and user-friendly. In many states, the process of registering an LLC is simple enough that it could be done in no time and with no special expertise. Sites like Start Filing and many other agents like them offer a straightforward platform to register your LLC.
- There’s No Limit To Ownership
You can form an LLC independently or with as many people as you like. If you’re scared of absorbing the risk of business ownership, you could team up with others and register your LLC.
- There’s Limited Liability
As its name suggests, an LLC has limited liability. This means when you’re running an LLC, all your personal assets, such as cash and cash equivalents, bank accounts, certificates of deposits, and the like, are protected from any creditor that may want to claim from your business. All you need to do to ensure this protection remains is to keep your business finances separate from your personal finances.
- It Involves Easy Tax Filing
An LLC is what’s known as a pass-through entity. This means its profits or losses are passed on directly to its owners without first going through government tax reporting. In simple terms, your business profits don’t have to be taxed by the government at a company level. They’re instead taxed through your income tax returns as a business owner.
Filing taxes as an individual is a lot easier than doing it at a business or corporate level. In the event of a loss, you’d also have the advantage of reflecting the loss on your returns, thereby lowering your tax burden.
- It’s Easy To Manage
LLCs are easy to manage. They’re member managed by default, but they have an option to select nonmembers to manage the company. Thus, you have the option to handle the day-to-day operations of your LLC, or you could get others to handle them. If you want to employ more experienced or qualified people to manage your LLC, you can file with the secretary of state or other such authorities.
The Cons Of LLCs
Like any other business, an LLC has its own few disadvantages. Below are some of them.
- It Has Limits
If you don’t separate your business and personal finances, you could risk piercing the corporate veil. In such a case, a judge can rule your personal assets are not protected by your LLC. If the court can prove you’ve run your business in ways that resulted in losses for others, they may hold you liable and go for your personal assets.
- There’s A Need To Pay Self-Employment Tax
Generally, when it comes to tax issues, your LCC is considered the same as a partnership, unless, of course, you choose to be taxed as a corporation. Because the Internal Revenue Service (IRS) would consider you self-employed in an LLC, you’re compelled to pay self-employment, including Social Security and Medicare taxes. This is, nonetheless, based on your business’s net earnings.
You could, however, file forms with the IRS so you’re taxed as an S corporation. This would mean as an LLC owner, you’d pay Social Security and Medicare based on your actual compensation instead of the company’s gross profits.
- The Death Or Loss Of A Member Dissolves The LLC
In most states, you have to register another LLC if one of your members dies or goes bankrupt. Apart from this inconvenience, you may also have to adopt any remaining financial or legal obligations.
- It’s Not Always Investor-Friendly
Investors are more likely to invest in a corporation than an LLC. This could make it harder to raise the financial capital you may need for a smooth operation.
Conclusion
As briefly shown above, an LLC has many great advantages, but it may have some disadvantages, too, depending on your business goals. One thing for sure is that an LLC could be a great way to start your enterprise.
