When you are looking to start a business you have a few different options regarding the type of entity you can form as. Limited liability companies (LLCs) are a great option for sole proprietors or partners that are looking to protect their personal assets. This is because LLCs generally provide liability protection to their owners (known as members). Despite this, there are advantages and disadvantages to limited liability companies. Consider all of the pros and cons before deciding how you wish to form, and if it is right for you.
Advantages of an LLC?
Limited Personal Liability
As a sole proprietorship or a partnership, your business is no different than who you are. This means for tax purposes and liability purposes, you and your business are one and the same. In this case, if you have a business partner that is accused of negligence or even an employee, your personal assets might be at risk. This also means that your business debts are also your personal debts.
LLCs are responsible for their own debts and obligations. Even though you can lose the money you invested into the company, your personal assets will be safe. Your personal assets cannot be collected to repay business debts. This is one of the main benefits of an LLC.
LLCs get various benefits when it comes to taxation. Although LLCs do not have their own federal tax classification, LLCs can choose to elect status as sole proprietorships, partnerships, S corporations, or C corporations.
Single-member LLCs are classified as sole proprietorships, while multi-member LLCs are classified as partnerships for tax purposes. In general,, LLCs are able to take advantage of "pass-through" taxation. This means that LLCs do not pay taxes themselves, but rather, income and debts are passed on to owners. Then, the owners will pay taxes for the business on their personal tax returns. To compare, C corporations are usually taxed twice on distributions. This is done both at the corporate level as well as the individual level.
Although similar to LLCs, S corporations enjoy pass-through taxation, there are also ownership restrictions. S-corporations cannot more than 100 shareholders, nor foreign shareholders or shareholders that are corporations. LLCs are always given pass-through taxation without any restrictions.
Corporations have a fixed management structure. This means that they must have a board of directors that oversees company policies, and officers who run the day-to-day business. LLCs do not need to use a formal structure, nor follow specific rules regarding how to run the business.
The third way that LLCs are given a flexible system of operating is in how they distribute profits to their owners. There is no requirement to legally distribute them equally or according to ownership percentages.
When formed anonymously, an LLC can provide complete privacy protection. This can be helpful for those who work in real estate, are public figures, or simply wish to live a private life. An Anonymous LLC is the same as a regular LLC. The only difference is the additional benefit of not disclosing ownership information on the Internet. This can be done by having your registered agent on all of the public information.
Less Paperwork as Compared to Corporations
Even though corporations also offer limited liability, there are a number of requirements that lead to a lot of paperwork. For a small, informally run a business this may not be necessary. Corporations hold annual shareholder meetings, as well as make annual reports and pay annual fees to the state. LLCs do not need to hold meetings and are not required to keep extensive records.
Disadvantages of an LLC
- Some states charge extra fees for operating an LLC.
- Income splitting is available, but income may be subject to payroll or self-employment taxes.
- Some states do not allow professional groups such as doctors, to operate as an LLC.
- Consent is required for the transfer of membership interests.
Who Should Start an LLC?
If you have a business that is either a sole proprietorship or partnership then an LLC may be a good option for you. Setting up an LLC will provide you the legal protections that are given to a corporation, but it will allow you to continue to run your company as a small business.
Some professionals that operate under professional LLCs include lawyers, doctors, architects, engineers, accountants, and chiropractors. This is because people in these professions typically try to limit their personal liability in their lines of work.
How a Business Lawyer Can Help
Forming an LLC does not require an attorney but in most cases, it can help you to do a more thorough job. Using a business lawyer will save you time and offer you advice from an experienced business incorporation expert. They will ensure that your filings are done correctly. The only downside is that you will have to pay a bit more than if you did it on your own.