Are you among those who are running a small business or an LLC? Well, running the business is not that challenging than handling its legal entities and taxes. One of the essential questions that arise in your mind before going to form a company is how you pay taxes, your personal liability, and, of course, the regulations encountered.
Now, if you research the market, you might have come across the term LLC or Limited Liability Company. Well, LLCs share many of the same qualities as an S-corp or C-corp. This article puts light on both the advantages or disadvantages of LLCs.
What is a Limited Liability Company?
LLC stands for Limited Liability Company, which is a corporate structure that has features of both Partnerships as well as traditional corporations. One of the services an LLC provides more liability protection than individual ownership.
Now, owners of LLC have no other personal liability for the obligations. Moreover, an LLC offers complete liability protection to all the members of the business. So, let’s quickly dive in and find what are the advantages and disadvantages of forming an LLC. If you need any information regarding how to start an LLC, then please refer to this LLC formation guide by Lawsuit FAQ.
Advantages of Limited Liability Company
Here are some of the advantages offered by LLC and why you should choose it.
i) Less Paperwork
One of the key advantages of forming LLC in comparison to others is it requires less paperwork. In comparison to C-Corps or S-Corps, an LLC is pretty much flexible. You just need an LLC Operating Agreement to create rules that can govern your business.
Apart from the paperwork, the LLCs are quite easier to form and easier to keep in good legal standing.
ii) Tax Flexibility
Well, the IRS didn’t consider an LLC entity to be separate for tax purposes, which means that the IRS didn’t charge any tax on the LLC directly initially. Instead of that member of a particular LLC can decide how they want to pay tax and some of the options are as follows:-
- Single Member LLC – In single-member LLC, a person is taxed like a sole proprietorship. In these profits as well as losses of the business are not directly taxed, but they are taxed the single member’s personal tax return.
- Partners in LLC – In this type, the members can elect to be treated as a traditional partnership for tax purposes.
- LLC filing as a Corporation – You might get familiar with the name in this the members of the company have to choose a file as if they were a corporation.
Usually, the members of LLC will create an ‘Operating Agreement’ that summarises how LLC treats for tax purposes.
In both LLCs and LLPs, the government doesn’t involve too much. Partners or members can buy and sell their ownership, can change management, or restructure without reporting to any government body.
A person only has to report to the legal service to the secretary of state and file an annual report of their earnings, losses as well as profits with the IRS. Apart from that, they are not even regulated in the way corporations are, and that’s the most significant advantage of owning an LLCs over corporations.
iv) Freedom in Management
When operating an LLC, you require quite less administrative and paperwork. Radically, a. Limited Liability Company doesn’t hold regular meetings nor issue stock certificates; therefore, they are easy to manage and operate. Moreover, keeping and auditing the financial statement of an LLC is less challenging.
Disadvantages of Limited Liability Company
Not only LLC has advantages, but there are a bunch of disadvantages of forming an LLC, and those are as follows.
i) Pass-through Taxes
Basically, LLCs don’t deal with the ‘Double Taxation’ faced by a corporation. However, they do incur ‘pass-through’ taxation, meaning that profits and losses are reported on each owner’s or shareholder’s individual tax return. Because shareholders don’t appreciate pass-through taxation; therefore, LLC is more suited to a one-person owner situation.
ii) Challenging to Hike Capital
Limited Liability Company or LLC has two sources of raising funds as a corporation, and those are equity and debt. Now, these are as follows:- Tasing funds with equity means you need to sell ownership stakes of the business while, on the other hand, in debt, you need to search for the investor.
The equity you have officially a new member with which you have to discuss everything before making any decision.
iii) Limited Eligibility
Well, the majority of businesses are not eligible to structure themselves in a Limited Liability Company. Some of the examples are banks, insurance companies, as well as healthcare service companies.
iv) Self-employment Taxes
One of the significant drawbacks of LLC is the self-employment taxes. Under the U.S laws, the profits of a Limited Liability Company are subjected to the self-employment tax of members. So, before going to start an LLC, you must speak to your lawyer and accountant first and then go ahead.
So, operating a Limited Liability Company is not that challenging than managing a corporate. It is being said that managing Limited Liability Company gives you freedom in tax, management, and more. Now, as you know that everything is not perfect; therefore, it has some of the disadvantages too. In this article, I have tried to puts lights on dark sides of an LLC also.
Now, if you think that we are missing on anything, do leave a comment below. For any queries or suggestions, leave a comment below.