If you are a small business owner, you may have wondered if setting up an LLC is right for you. As with any type of corporation, an LLC has pros and cons within both structure and practice. To find out if this is the right move for you and your business we explain common LLC pros and cons.
To start, probably the most significant benefit of forming an LLC is the protection that it offers. LLC stands for Limited Liability Company. As the name suggests, there is a limit to the liability that an LLC member has to face. In other words, in the event of bankruptcy, liquidation, or other financial hardship, the members of the company do not have to pay from their own assets to cover the debts of the LLC.
LLCs are also considered pass-through companies. What this means is that any profits to the LLC pass through the corporation. They go directly to the LLC members without first facing government taxation.
Another benefit of an LLC is the simplicity. This type of corporation is very easy to set up and provides a great deal of flexibility to its members in running the corporation. LLCs can be set up by a single individual, by a group of people, or even underneath a parent company. There are generally less paperwork and lower filing costs associated with forming an LLC.
There is also a high amount of flexibility in regard to taxation. The corporation is able to taxed as a sole proprietor, a partnership, an S corporation, or a C corporation.
As with anything, where there are pros there are bound to be cons as well. Here are a few.
While LLCs offer a significant amount of liability protection, it is not all-encompassing. This means that there are instances where a court can rule that the LLC does not in fact protect the member’s assets. For example, the member did not sufficiently separate the business interests from their own personal interests. This can be quite a costly ruling, so be sure to consult with your attorney on a regular basis to ensure proper delineation between these assets.
Additionally, the IRS views LLCs the same as partnerships. This means that members are considered to be self-employed. The result of this is that the members are responsible for including the LLCs assets in their personal tax return and will be required to personally pay toward Social Security and Medicare.
As an LLC member you are not able to pay yourself a wage, so your income is solely from income earned by the LLC. And, as investors are more likely to invest in a corporation, it can be difficult to raise capital. Be prepared for an uphill battle.
Lastly, depending on your location, there may be renewal fees or publication requirements, and these can be quite costly. It is important to know these costs for your state, so speak with your attorney to determine what the required fees are in your location.