With many of the advantages of incorporation, without many of the headaches, it’s no wonder that the flexibility of the Limited Liability Company (LLC) is gaining popularity among business owners across the country and around the world. . But before you take that leap; Is it right for your business?
Understanding the Limited Liability Corporation
The LLC is a type of hybrid business structure that offers many of the advantages of a corporation, but with the tax advantages and management flexibility of a partnership. It’s a popular option for sole proprietors who want to protect their personal assets or secure additional loans, and an LLC can be one of the easiest and least expensive forms of ownership to set up. The limited liability company is now recognized in all 50 states plus the District of Columbia.
Sounds great right? Well, it is for many companies. But let’s take a look at some of the advantages and disadvantages of forming an LLC.
Advantages of forming an LLC:
o Red tape liability protection: In general, there is no personal liability of members (owners) for business debts. And unlike a regular corporation, there are no requirements for regular shareholder meetings, board meetings, or formal minutes.
o Tax Free – Unless you elect to pay tax, profits and losses are passed through to members. With an LLC, there is no threat of double taxation since a limited liability company is not a separate taxable entity. And for tax purposes, an LLC’s allocation of profit and loss need not be proportional to ownership interests.
o No citizenship requirements: You do not need to be a US citizen to own or invest in an LLC.
So why isn’t everyone jumping on the LLC bandwagon? Let’s be honest, nothing is perfect – there will be some costs and headaches that come with operating as an LLC.
Disadvantages of forming an LLC:
o Increased banking costs: Accounts for small businesses or informal associations are often free, as long as you maintain a large balance. But a bank account for a limited liability company will probably have fees of $10, $20 or more each month. Something to have in mind.
o More complicated tax returns: An LLC will file its own tax return if it operates as a partnership, C corporation, or S corporation. That means your return could cost as much as a few thousand dollars each year.
o More paperwork: Documents for a limited liability corporation must be filed with the state, unlike a general partnership. That means a little more bureaucracy.
o Lack of familiarity – The limited liability company is the new kid on the block. Although this is changing rapidly, some people are not as familiar with the LLC as they are with a regular corporation, something to consider when attracting investors, etc.
So the question to ask yourself as a business owner is, “Do the benefits of forming a limited liability corporation outweigh the costs?” If you’re still not sure, it may be time to talk to an expert.
While LLCs are fairly easy to set up yourself, it might be worth talking to a lawyer or accountant about tax issues and the pros and cons of creating a limited liability company. Another great option is to use an online incorporation firm. Many companies like The Company Corporation, for example, specialize in offering their know-how to entrepreneurs who need a little help. They can answer your questions and help you set up your LLC for a fairly reasonable price.
