A limited liability company (LLC) is generally a low-cost structure many entrepreneurs utilize in an attempt to limit financial and tort liability, and assure that any problems that arise business remain company concerns, not personal ones.
It’s important to understand that even the smallest of businesses have the potential to be the target of a lawsuit. We all are capable of making mistakes, but our business mistakes don’t need to become personal.
A limited liability company is one of several business structures – other examples include a corporation, which is a company or group of people that act as a single entity – that protects personal assets; general partnerships, in which two or more people agree to share assets, profits, and liabilities of a business; and a sole proprietorship, which means the business and personal funds are not separate. The latter two entities (as well as doing nothing and being considered a sole proprietorship) can both put personal assets at risk.
Advantages of an LLC
Entrepreneurs who designate their companies as LLCs :
- Personal assets are safe. Unless they run the business very sloppily, the owners (called “members”) of an LLC will not lose their personal funds or possessions over the LLC’s debts or lawsuits.
- Tax benefits. An LLC’s profits go directly to the members who will then report those profits as part of their individual tax returns, meaning the business profits are only taxed once. Other business models may find profits being taxed before being distributed to the business owners (called “shareholders”), and again as part of the shareholders’ personal tax returns. LLCs can also be taxed as a C-Corporation, which is taxed separately from its shareholders, or as an S-Corporation, which is not taxed separately, so there are flexible options.
- Forming and maintaining an LLC is simple. Generally, there isn’t the same amount of paperwork with an LLC as there might be with a more formal corporation; there are no requirements to hire people for officer roles such as a CEO, a CFO, or a CMO; and annual meetings, company minutes, and other paperwork isn’t required.
- Flexible management. An LLC can be managed by a single member or several members.
- Business credibility. An LLC designation makes an entrepreneur and their business appear more professional.
- Loans are more attainable. As an LLC, members can develop a credit history that will make it easier to obtain loans or credit cards that can help build the business.
Disadvantages of an LLC
While the professionalism of an LLC makes it an attractive business decision, there are still drawbacks.
- Tax rates. Because of the way an LLC is set up, business profits are taxed at an individual rate rather than a business rate.
- Tax filing. Another tax disadvantage is that all members of the LLC must wait for the LLC to send out K-1 forms (which determine profit or loss associated with the LLC) before filing personal taxes. Because of this particular rule, some sophisticated investors are less interested in funding LLCs than e.g. a C-Corp. However, a conversion can always be made from an LLC to a C-Corporation if this becomes an issue.
- LLCs are fragile. If a member dies or goes bankrupt, the LLC ends.
- The costs. Generally, setting up an LLC without thinking out the essential elements leads to a poor legal organizational foundation. Many times the clean-up is far more arduous than just doing it right the first time. Accordingly, it is beneficial to work with a competent attorney to structure the business correctly, prepare an operating agreement, and otherwise assure that all parties’ rights are protected.
Because there is no single solution for every type of business, consulting with an experienced attorney can help you determine whether or not an LLC is the right move for you and your business. If you are looking for answers, please contact us today at 888-EMERGE-0 to find out how we can help you determine if an LLC is right for you.