Much has been made in the business world about the benefits of forming your business as a limited liability company (LLC). But before you make the decision, it’s important to understand the advantages and disadvantages of this type of business structure.
Combining some elements of a corporation and some elements of a partnership/sole proprietorship, the LLC is not considered a corporation, but it does provide some of the same protection a corporation offers. Here are some more details on the advantages of an LLC:
- More flexibility: Although a limited liability company must file articles of organization with the state, it has a more flexible management structure than a corporation. The flexibility evolves from the phrase “unless otherwise provided for in the operating agreement.” This allows business owners to create a structure tailored to the business owner’s requirements.
- Limited liability: As its title suggests, the LLC protects owners and shareholders from personal liability in case of judgments or debts against the business.
- Tax options: An LLC can choose whether it wants to be taxed as a sole proprietorship, partnership, S corporation, or corporation.
- Fewer compliance issues: In most states, an LLC doesn’t need to have an annual meeting, and the LLC isn’t required to have a board of directors. Plus, there’s less paperwork and recordkeeping required compared to a corporation.
- Perpetual existence: Like a corporation, an LLC has a life of its own and can continue to exist after the owners sell their shares or die.
- Investors: Much like a limited partnership, members of an LLC can be investors only and have little or no say in the daily operation decisions of the business, as long as this is stated in the operating agreement.
There are also some disadvantages to an LLC:
- Pass-through taxes: Although LLCs do not deal with the “double taxation” faced by a corporation, they do incur “pass-through” taxation, meaning that profits and losses are reported on each owner’s or shareholder’s individual tax return, whether or not the shareholders receive dividends. Because of that, the LLC may be more suited to a one-person owner situation, as shareholders may not appreciate pass-through taxation.
- Raising money: Because of the lack of a strict corporate structure and the pass-through taxation, investors may be hesitant about putting their money into an LLC.
- Additional taxes: Many states, such as California, New York, and Texas, to name a few, require LLCs to pay a franchise tax or “capital values tax.”
- Less structure: The lack of strict requirements for governing the business could mean problems down the road unless a detailed operating agreement is in place, which requires additional upfront costs such as attorney fees.
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