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Limited Liability Company (LLC) Pros And Cons

No business entity is perfect, but some are better for you and your business than others. LLCs are attractive because they avoid some of the technical requirements of a corporation while providing liability protection and tax advantages according to a partnership dispute lawyer.

What Is An LLC?

An LLC is a business structure that protects owners’ assets from lawsuit liabilities and debts from creditors. LLCs are hybrid entities combining aspects of a corporation and a partnership or sole proprietorship. Members own them, and there can be a single or many members.

What Are The Tax Benefits Of An LLC?

LLCs are considered a pass-through entity for taxes. Members typically pay income taxes as personal taxes based on their share of ownership. If you have a single-member LLC, all your business profits are taxable income for your personal taxes. Some states require LLCs to pay taxes or fees if the business is active. If you can file your taxes as an S corporation, the LLC will be a pass-through entity.

If you file as a C corporation, you will be taxed twice (the corporation will be taxed, and shareholders’ dividends will be taxed individually as income). However, money retained by the LLC can pay members as employees, and they pay income taxes, but the LLC, not members, pays self-employment taxes. Most states do not restrict who can be an LLC member. LLC members can be individuals, other LLCs, corporations, and foreign entities.

Other LLC Pros

According to Focus Law LA, other benefits of using an LLC include:

  • Asset protection: LLCs offer limited liability protection for your personal assets if your LLC is sued or it files for bankruptcy protection
  • Simple business processes: There’s no board of directors or annual shareholder meetings
  • Marketing and branding: Having an LLC and marketing yourself as such makes you appear more substantial and trustworthy compared to a sole proprietor

Each state has its own business laws, so the benefits and costs of an LLC compared to other entities will vary.

Some LLC Cons

Some downsides of forming an LLC include:

  • Fees: Creating and maintaining an LLC will cost you state and administrative fees as well as the need to pay for a registered agent service
  • State laws may require the dissolution of your LLC: Depending on your state’s laws, changes in LLC members may force you to dissolve the LLC unless there is an operating agreement otherwise
  • It’s not a good choice if you want outside investors who prefer the legal protections corporations offer

There’s no free lunch when it comes to business entities so no matter which one you choose there will be some negatives.

Is An LLC The Best Fit For Your Business?

An LLC is a simple business structure that can be started quickly. Necessary paperwork is kept to a minimum while you have personal liability protection against business debts and liabilities.

If you’re thinking of starting a business or changing your current business entity, think about what you want from your business and how you’ll accomplish it. Speak to an attorney who’s experienced in working with small businesses so you can discuss the legal and practical aspects of using an LLC or other business entity.