Home Business Insights & Advice Four pros and cons of forming an LLC for your business

Four pros and cons of forming an LLC for your business

by Ben Jones
15th Nov 22 2:33 pm

Launching your own business can be a promising way to earn a living while having the
flexibility to plan your schedule. And as you brainstorm a business plan, aside from finalising your products or services, one of the things to consider is how your firm will be structured.

This is a critical step since choosing a structure for your business can affect your share of
earnings, how much taxes you pay, your ability to raise money, and the level of liability to your personal properties or assets. That said, there are various forms of business structures. And one of them is the limited liability company (LLC).

Overview of an LLC

An LLC is a business that combines the characteristics of a partnership with those of a
corporation. For instance, the company doesn’t pay taxes to the government in its own name. Instead, the owner is the one who bears the tax burden as they would in a partnership business.

At the same time, an LLC exists as a corporation since it’s treated as a separate entity from its members. Therefore, members are not legally liable for the company’s debts and other liabilities. And because it has a legal personality in the eyes of the law, an LLC can sign contracts, hire and fire employees, and do many other things in its own name.

That said, launching an LLC can sometimes be overwhelming, especially for new entrepreneurs. Fortunately, you can partner with LLC services to help you streamline the process. These are professional companies that can assist individuals in starting their businesses, specifically LLCs. They can help you organise and file all the required documents with the state, thus enabling you to concentrate on other business matters. They can also offer advice to ensure you don’t make costly mistakes that could hurt your finances and your firm’s operations.

Suppose you’re considering forming an LLC for your business. To help you make a more
informed decision, this article will look into its pros and cons. Continue reading below to learn more.

Pros of forming an LLC for your business

There are several benefits of running an LLC. They include the following:

1. Provides Limited Liability to its members

As mentioned earlier, this type of business structure can offer protection or shield its members from being personally liable for the company’s actions. This means that creditors and other lenders can’t come for your personal assets, such as saving accounts and other properties, to recover the amount your business owes from the company. On the other hand, this can happen to business owners operating under sole proprietorship or general partnership.

2. Allows for pass-through taxation on earnings

Typically, an LLC doesn’t pay taxes to the state in its own name. Any profit or loss made by an LLC is passed through to members, who then pay taxes on their share of earnings. That means that your LLC gets to minimise expenses to maximise profits, and the members avoid double taxation.

3. Provides flexibility in membership

An LLC doesn’t limit who can be its member. Anyone, including individuals, partnerships, or even corporations, can become owners of an LLC.

Additionally, an LLC doesn’t have a limited number of people who can be its members.
However, if you’re choosing an S corporation tax structure, note that there’s a maximum number of people who can be its members. And in most states, the limit is 100 members.

4. Has fewer formalities

Unlike other structures like corporations, LLCs are more versatile. For instance, running a
corporation requires you to hold annual general meetings. And that comes with a huge
investment in time and money.

On the other hand, LLCs aren’t legally required to hold annual general meetings. However, the management or members may organise meetings from time to time or when necessary.

Cons of forming an LLC for your business

As you’ve seen above, there are several benefits to running your business as an LLC entity.
However, it also has some drawbacks. They include the following:

1. Limited liability to members has limits

You must understand that the limited liability you enjoy has a limit. For example, suppose your business loses its good standing with the state or a creditor is suing your company. Such an instance can pierce the corporate veil, wherein the courts will disregard the corporation or LLC’s separate existence. In such a situation, your personal properties won’t be protected, and you’ll likely lose them.

2. It can be expensive to form an run

Unlike other business structures like sole proprietorships and general partnerships, LLCs are usually costly to form and run. For instance, you’ll likely pay huge formation fees. Additionally, you might be required to pay annual report fees as you continue running the business.

3. Difficulty in transfer of ownership

With business structures like corporations, shares can be easily transferred to increase ownership and company capital. That’s true since shareholders can freely sell their shares to other people.

On the other hand, no member can sell their shareholdings to someone else in an LLC unless all owners agree.

4. Confusion about roles

Unlike corporations that have specified roles for each individual, LLCs don’t. And in some cases, that brings about confusion when running operations. For instance, investors and third parties may not know who they should contact or who should sign contracts.

Moreover, an LLC generally has no restrictions on who can manage it. For instance, all members can manage the company by participating in all decision-making processes. Alternatively, the company can hire professional managers to oversee the business on behalf of the members or shareholders. While this can be an advantage for some, this can also create confusion among members.

Takeaway

A Limited Liability Company (LLC) is one of the common business structures you can consider for your firm. However, deciding whether or not this structure is the right one for your business can be overwhelming. But with the pros and cons listed and explained in this article, hopefully,  you can be guided to make a more informed decision for your company.

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