THE PROS AND CONS OF FORMING AN LLC FOR YOUR BUSINESS
Limited Liability Companies (LLCs) offer a wide variety of benefits for business owners. They provide a lot of the benefits of having a corporation without all of the paperwork and red tape that is required to legally maintain a corporation.
Why are LLCs so popular?
Although the traditional C-Corporation is likely the first type of business that comes to mind when considering business entities, it is actually far less popular than you might think. LLCs are popular because they are not only very easy to form, but they are also easy to run. They make taxes much more streamlined, and they have limited liability for owners too.
What are the benefits of choosing an LLC as a business entity? An LLC gives you the benefits of a corporation without all of the hassles. Some of the most important benefits are outlined below…
Limited personal liability:
An LLC is a separate legal entity. It can hold real estate, create contracts, get sued, and take on debt, just like you can as an individual. It can also be legally liable for certain obligations and commitments.
Like a corporation, an LLC insulates the owners of the company from business liabilities. If the company cannot pay a debt or it gets sued, the owners' personal assets are not at risk. Instead, liability is limited to whatever assets the company may have.
To take full advantage of limited liability, be sure that you keep the LLC's books, records, and bank accounts separate from your private accounts. Ensuring that your company acts like a company will help address any challenges to extending liability for the LLC.
Tax advantages:
Although an LLC is a separate legal entity, it is not a separate entity for tax purposes.
Less paperwork:
An LLC does not have to meet the specific requirements regarding filing that a corporation must use under state law. Holding meetings, creating annual reports, and paying annual fees are all pretty common for a corporation. But an LLC can often avoid these time-consuming requirements. Forming an LLC is often a much easier process as well.
Ownership and management flexibility:
An S-Corporation has the benefit of pass-through taxation, but it cannot have more than 100 shareholders, and they cannot have foreign shareholders or shareholders that are corporations. LLCs do not have those same restrictions – and they can use pass-through taxation if they want to do that.
What are the challenges and disadvantages of an LLC?
Even though there are quite a few benefits to an LLC, there are some drawbacks as well. Many of these drawbacks are state-specific. For example, in some states, if you have a single-member LLC, you may not get the same type of liability protection that you would have if you had more than one member. Other states, like California, will actually charge you more in fees to form an LLC compared to forming another type of entity.
Income splitting taxation:
You might also find some issues with income splitting. Some or all of your income from an LLC may be subject to self-employment or payroll taxes.
Transfer restrictions:
Although restricting membership transfer can sometimes be a benefit, it can also be a challenge to attract new owners or investors. Transferring membership interests in an LLC is more challenging than just buying and selling stocks in a corporation.
This document is designed for general information only. The information presented in this document should not be construed to be formal legal or tax advice nor the formation of a lawyer/client relationship.
For more information on this and other topics, please contact Kevin via any of the channels listed below:
📧 kevin@kmckernan.com | 📞 718-317-5007