The Pros and Cons of LLC Business Structure
A limited liability company, or LLC, is a hybrid business structure that combines the simplicity, flexibility, and tax advantages of a partnership with the liability protection of a corporation. An LLC may have one or several “members,” the official word for the owners. According to ZenBusiness.com reviews, clients may be individuals or companies, and there’s no limit to the number of members that an LLC can have. Having an LLC arrangement, members’ assets are protected by the company’s creditors. If an LLC is an option for your small business, then take a look at the pros and cons below to assist you in your decision.
The Pros
Choosing to structure your business as an LLC offers several advantages:
Federal taxation on profits. If it can’t be avoided, an LLC is a pass-through entity, which means its profits go directly to its members without being defrauded by authorities through the corporate level. Instead, they’re taxed on the members’ tax returns. And if your company loses money, you and the other members can take the hit on your profits and reduce your tax liability.
Management flexibility. An LLC can opt to be managed by its members, which allows all owners to share in the business’s day-to-day decision-making, or by managers, who can be either members or outsiders. This is helpful if members aren’t experienced in running a business and want to hire people who are. In many states, an LLC is member-managed by default unless explicitly stated otherwise in filings with the secretary of state or the equivalent agency.
Limited liability. Members are not personally liable for the provider’s assets. This usually means that members’ assets – homes, cars, bank balances, investments – are protected from creditors seeking to take advantage of the business. This protection is good, as long as you manage your business properly and keep personal finances separate from business finances.
Easy startup and upkeep. The initial fees and paperwork to form an LLC are relatively small, although there are wide variations in the fees and costs that apply in each state. For example, the filing fee for organization items in Arizona is $50, while the fee in Illinois is $500. Aside from these variations, the method is simple enough for homeowners to manage without any special expertise, although it is a fantastic idea to talk to an attorney or accountant for help. Ongoing requirements are usually annual.
The Cons
Before registering your business as an LLC, think about these potential disadvantages:
Limited liability has limits. In a lawsuit, a judge may find that your LLC structure does not protect your assets. The claim is known as “breaking the corporate veil,” and you may be at risk if, for example, you don’t clearly distinguish business transactions from personal ones, or if you’ve been shown to have operated the business fraudulently, causing losses to others.
Self-employment tax. By default, the IRS treats LLCs the same as partnerships for tax purposes, unless the individuals choose to be taxed as a partnership. If your LLC is taxed as a partnership, then the government believes that the members working for the business are self-identified. This usually means that these members are responsible for paying Social Security and Medicare taxes, collectively called self-employment taxes, which depend on the total income of the business. On the other hand, if your LLC files form with the IRS to be taxed as an S corporation, you and the other owners who work for your business pay Social Security and Medicare taxes only on the actual compensation, not on the total pre-tax income of the business.
Result of member turnover. In most jurisdictions, the LLC must dissolve when a member leaves, goes into bankruptcy, or expires, and the remaining members are responsible for any financial and legal obligations required to terminate the business. These members can, of course, continue to conduct their business; they just have to form an entirely new LLC from scratch.