Forming a limited liability company (LLC) is often a smart way to set your business up
for success.

But like anything in business, the LLC structure has pros and cons.

In this article, we’ll cover six essential benefits of LLCs, six possible drawbacks to keep in mind, and six other business entity types to consider.

What Is an LLC?

LLCs are relatively easy and inexpensive to establish.

An LLC is a business structure authorized by statute in all 50 states. It’s not a corporation – instead, it’s described as a hybrid entity that combines certain features of a corporation and a sole proprietorship or general partnership. As such, it’s often considered a simplified solution for smaller enterprises looking for a layer of personal asset protection, a choice of tax systems, and the ability to grow.

Pros of LLCs

The LLC structure offers several key advantages to small business operators:

  1. Purpose. LLCs can be formed by a wide range of enterprises, including brick-and-mortar retailers, online businesses, home-based businesses, and rental properties.
  2. Ownership. In most states, LLCs can have an unlimited number of members, including noncitizens and even other business entities. They can also have subsidiaries. And they maintain the flexibility to distribute profits and losses among members not proportionally to their ownership percentage.
  3. Operations. LLCs are relatively easy and inexpensive to establish, and you don’t have to abide by formalities like appointing a board or holding shareholder meetings.
  4. Management. Depending on their needs and goals, the members of an LLC can choose whether the business will be member-managed or manager-managed.
  5. Liability. In most cases, the members of an LLC are not held personally responsible for the business’s debts or legal judgments or for the actions of other members.
  6. Taxation. LLCs can simplify taxes, with income “passing through” to members’ individual returns. Profits can be allocated on almost any basis members agree on.

Cons of LLCs

LLCs are a great option for many businesses, but it’s important to know the potential downsides:

  1. Purpose. Banks and insurance companies can’t be LLCs, and certain licensed professionals like doctors, lawyers, and architects must form a special type of LLC.
  2. Ownership. LLCs can’t raise capital by issuing stock. Also, ownership interest isn’t always freely transferrable, and a member’s departure may trigger dissolution.
  3. Operations. Laws vary by state, which can complicate interstate operations. Ongoing requirements may include maintaining a registered agent and issuing reports.
  4. Management. Decision-making and accountability can become muddled when there are several members and no formal executive and governance framework.
  5. Liability. If personal and business finances get commingled, creditors and litigants can go after members’ personal assets. Additional caveats apply.
  6. Taxation. By default, LLC income is taxed at individual rates, which can be higher than corporate rates, and it’s also normally subject to self-employment taxes.

Other Options

Before deciding to form an LLC, it’s wise to explore all the other possibilities:

  1. Sole proprietorships. These don’t require filing fees, but you’re personally liable for business debts and judgments, and growth opportunities may be limited.
  2. Partnerships. They come in several forms, with general partnerships operating like sole proprietorships and limited liability partnerships resembling LLCs.
  3. C corporations. Larger firms that want to sell unlimited stock for expansion while securing a lower maximum tax rate should consider incorporating in their state.
  4. S corporations. This can be a best-of-all-worlds scenario for certain enterprises that are looking to maximize tax benefits and that meet IRS eligibility requirements. While S corporations can offer tax benefits and a corporate structure, they come with their own set of IRS eligibility requirements and limitations on the number and type
    of shareholders.
  5. Cooperatives. Owned by workers, producers, or community members who share in profits and decision-making, co-ops often have social and economic goals.
  6. Specialized entities. If your business model is out of the ordinary, an attorney can help you explore lesser-known entities like cooperatives and close corporations.

Ready for Launch

For individualized guidance on preparing your business for success, consult your financial institution.

Post Views: 1