Limited liability companies (LLCs) are among the most common corporate structures in the United States.
They’re an attractive option for entrepreneurs because they have the best features of both Partnerships and Corporations.
For example, you can enjoy the limited liability of Corporations and the tax benefits that Partnerships offer. Apart from these, they also have some unique features of their own.
If you’re considering establishing an LLC, you should take a look at both the pros and cons before deciding to go ahead with it.
Here are their advantages and disadvantages you should know.
Advantages of LLCs
1. Easy to Form
Forming an LLC is easy. It’s required to file your Articles of Organization with the Secretary of the State. They’re also inexpensive to form, but do require federal and state level fees.
2. No Double Taxation
Double taxation can be challenging for business owners. LLCs ensure that you don’t have to face this issue.
In single-member LLCs, the income flows through to the members so that they only have to pay their personal taxes.
However, for multi-member LLCs, this can prove to be a challenge because you need to pay a self-employment tax too.
To avoid this, you can choose to be taxed as an S-Corp. When you do so, you become employees of the S-Corp and receive a W-2. This saves you from having to pay double taxes. However, you will have to pay corporate taxes on the S-Corp.
3. Easy to Manage
It’s easy to manage your LLC as you don’t need to maintain any formal meeting records or resolutions.
4. Flexible Profit Distribution
Profit distribution doesn’t have to be fixed like in Partnerships. You don’t need to stick to the 50-50 profit distribution model, and can instead decide on a custom model.
5. No Liability
When you start an LLC, the owner is not held liable for any of the debts that the LLC accrues. LLCs take this feature from Corporations.
They exist as a separate entity, which is the reason why they require a Tax ID Number from the IRS.
1. Difficulty Going Public
If you intend to distribute employee shares or want to go public at a later stage, LLCs may not be the best option for you. Corporations are more suitable for these requirements.
2. State Filing Fees
LLCs are easy to form. However, it’s simpler to form Partnership or Sole Proprietorship firms as well. With LLCs, you need to do state-level and federal filings.
You’re also required to pay state filing fees when you form your company and annually after that.
To learn more about how LLCs are formed and the other advantages and disadvantages of LLCs, you can check the infographic below created by GovDocFiling, a professional filing service that can help you start your LLC