An LLC is a corporate framework or arrangement wherein the members are not held liable personally for its liabilities or debts. In other words, LLCs are primarily hybrid entities involving the features of both corporation and sole proprietorship. Although it is similar to the characteristics of a corporation with regard to liability, it differs from it in terms of taxation.
Every business has a structure; LLC refers to the simplest business structure which is also flexible by nature. Starting an LLC comes with its own share of benefits. The advantages and the disadvantages of forming an LLC have been mentioned below.
The Advantages of Forming an LLC
When starting an LLC, it is a good idea to get an insight into the merits and demerits of starting it before making the decision to materialize it. There are numerous pluses of starting an LLC which are as follows:
- Limited Liability: As the name indicates, an LLC limits the personal liability of members or owners of a company. That is to say, the liability of the members are only limited to their investment, and does not include their personal assets when it comes to settling the business debts. Thus, it provides an edge over regular partnership wherein the members are personally liable for a business debt.
- Simplicity: Unlike a corporation, which needs officers, a board of directors and the meetings of the shareholders, an LLC can be run on a regular basis without these formalities. Therefore, eliminates the requirement of getting an approval from the board while making key decisions, thereby making it smooth and less complicated.
- Inclusion or Involvement of All Members: While the inclusion or involvement of the members in decision making depends upon their personal liability in a normal partnership, an LLC does not necessitate the same when it comes to participation in its functioning. By doing so, it ensures maximum participation on the part of all the members.
- Flexibility: In case of an LLC, there is no restriction regarding the number of partners. Furthermore, it also provides for the distribution of profits among members, regardless of their investment percentages. The partners can be of any type, meaning that even foreign nationals may also be partners under the framework of an LLC.
- Business Credit: A partner in an LLC can build or apply for credit individually excluding the personal credit of another partner(s). Not only does such an arrangement helps eliminate personal liability, it also prevents the differences arising out of tension or creditworthiness.
- Pass-Through Taxation: The business profits in case of a limited liability company is filed on the tax return of each individual. As a result, it helps get rid of re-taxation on individual’s returns as it happens in c corporation.
The Disadvantages of Forming an LLC
Every coin has two sides; likewise, there are also certain disadvantages of forming an LLC in the United States which are as follows:
- Cost: In comparison to a partnership or sole proprietorship, an LLC can be a bit more expensive to operate. The cost can be slightly more than that of a corporation.
- Separate Records: One of the challenges which the owners of limited liability companies face is to keep its records separate from the records of their personal business. Maintaining separate records is of paramount importance to avoid any confusion or obfuscation in the finances of the company.
- Banking: If a cheque is made out to an LLC, it cannot be cashed. The only way to receive the money is to deposit it into a corporate account. In this regard, it is important to remember that the banks charge fees for the incorporation of a corporate account for business.
- Taxes: The owner of a limited liability company may be required to make payment for unemployment compensation – an aspect which is not required in case of a sole proprietorship.
The plan to start a business always has long-reaching consequences – it may make or break one’s career. When you decide to start a business, you also need to have a plan in place for paying taxes, liabilities and for following various regulations associated with the business which you are willing to start. While there are various choices available in this regard in the United States, the most obvious choice among the startup owners is a Limited Liability Company (LLC). A sound knowledge of the merits and demerits of forming an LLC.