LLCs are popular among businesses because they combine the best features of partnerships and corporations for your convenience.
While setting up a business, you’ll be faced with numerous choices. Among these, one of the most important decisions that you’ll make is that of choosing your company structure.
But why?
Your company structure defines how your business will operate. It also determines what you can and can’t do. The business structure even influences your taxation.
So, naturally, you’ll want to choose a structure that’s the right fit for your business.
When you’re looking at the various business structures, you should consider a limited liability company (LLC).
LLCs are popular among businesses because they combine the best features of partnerships and corporations for your convenience.
For instance, they borrow the limited liability feature from corporations while the flow-through taxation feature is picked up from partnerships.
So, why should you choose to establish an LLC?
Let’s find out.
Why are LLCs Good?
Here are the various advantages of establishing an LLC.
1. Limited Liability
As the name suggests, LLCs provide limited liability. This means that the members of the LLC won’t be held personally liable for the debts that the company accrues.
In essence, the LLC will be treated as a separate entity and this protects the members’ personal properties.
2. Flexibility and Ease of Formation
One of the reasons why many small businesses prefer LLCs is due to their ease of formation and flexibility. The process of forming an LLC is relatively easy. You just have to file Articles of Organization with the Secretary of the State and pay the filing fees.
Then, you have to get an EIN/Tax ID Number to start your business.
LLCs also give you great flexibility when it comes to profit sharing. You don’t need to stick to the 50-50 model. Instead, you can choose a model that’s agreed upon by all the members.
3. Favorable Taxation Model
When you establish an LLC, you’re also safeguarded from paying a lot of taxes. Unlike corporations, LLCs don’t have double taxation. Instead, all of the income flows through from the company to the member in the case of single-member LLCs.
However, for multi-member LLCs, the members are required to pay self-employment taxes.
To avoid this, you can choose to be taxed as an S-Corp. Doing so will mean that the members will be treated as employees of the company.
4. Easy to Maintain
Lastly, one of the biggest advantages of establishing an LLC is that you don’t need to put a lot of effort into managing your company.
Unlike corporations, you don’t need to maintain any formal records of meetings or minutes. It’s also not necessary to have formal resolutions.
Let’s now take a look at the reasons why LLCs may not be the best option for you.
Disadvantages of LLCs
Here are a few of the disadvantages of LLCs that you should keep in mind.
1. Expensive to Manage
While LLCs are relatively easy to form and manage compared to corporations, they’re costlier than partnerships and sole proprietorships.
When you register an LLC, you need to pay the state filing fees. These fees need to be paid for every year of the company’s operation.
What’s more?
You’re also required to do state and federal level filings for LLCs. This is something you don’t need to do in partnerships and sole proprietorships.
2. Difficulty with Shares
If you’d like to go public with your company at a certain stage, LLCs may not be the best option for you. Instead, you should choose a corporation.
The same applies if you want to issue employee shares.
Want to learn more about LLCs and how you can form one? Check out this infographic designed and developed by GovDocFiling.
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