Advantages and Disadvantages of Forming an LLC
Just like most things, there are both advantages and disadvantages to forming a Limited Liability Company (LLC). Before embarking on any new venture, it’s a good idea to make a list of positives and negatives, so you can analyze the pros and cons. This analysis enables you to fully understand your choices, so you can make the proper decisions. Take your business, for example. Establishing the proper business incorporation is a critical decision and could mean the difference between asset protection and asset losses, a lawsuit against your business or a lawsuit against your business and you personally, or payment of a reasonable amount of taxes or a lot. Advantages of LLC Formation 1. Limited Liability The most compelling reason to form an LLC is asset protection. Forming an LLC allows its members and managers to operate the company without putting their personal possessions in harm’s way—even if the company falls into debt or is facing other liabilities. An LLC exists and operates as a separate entity, and its members cannot be held personally responsible for any of the company’s debts. 2. Tax Benefits Another advantage over traditional corporations is the avoidance of double taxation—corporate tax and individual tax. In a corporation, the corporation itself is taxed, and therefore must file taxes. Then, profits to the owners are taxed. Hence, the double taxation. For LLC members, on the other hand, profits and losses can be listed on their personal income tax returns, which can result in big savings. Additionally, the managing member of an LLC can deduct 100% of the health insurance premiums he or she pays—up to the extent of their pro-rata share of the LLC’s net profit—because the profit is considered earned income. 3. Business Credibility Incorporating your business as an LLC gives your company the credentials it needs to become a real company. If you’re not incorporated, you’re not really a business. On the other hand, if you are officially incorporated, you can now issue stock, making it easier to establish credit or raise capital to expand your business. You can also issue that stock internally, boosting morale by creating a sense of ownership within the company. Having stock also allows you to transfer ownership to a third party by selling/transferring stock. Becoming an LLC suggests the company has a stable foundation and that it will be around to conduct business for the long run. Disadvantages of LLC Formation 1. Not Many Precedents LLC’s are relatively new entities; the first one was formed in Wyoming in 1976. Because they are fairly new, investors who are more comfortable with traditional corporate structures may shy away from them. Additionally, because they are new, there is a lack of case law for attorneys to sift through when trying cases involving LLC’s. 2. Different States Have Different Laws Not all businesses can operate as LLCs. In California, for example, the banking and insurance industries, along with accountants and licensed healthcare workers, are prohibited from forming LLC’s. Since you do not have to form an LLC in your home state, many business owners form an LLC in a state that is more favorable to them. For example, Florida LLC formation and Delaware LLC formation are two of the most popular choices. 3. Time and Money It costs money to form an LLC, and some states have cumbersome record keeping requirements that may require annual filing fees, making the LLC a potentially time-consuming and more expensive entity to maintain than a partnership. Still confused about formation of LLC? Let the experts at Your Entity Solution lead the way to a successful business incorporation that will protect you, your family, and your livelihood.