The Pros And Cons Of Forming A Limited Liability Company (LLC)

When it comes to running a business, there are various types you can choose from; it can be a sole proprietorship, a corporation, an unlimited liability company, and many more. How will you know the type to start from all the options available? This article will assist you by discussing the merits and demerits of an LLC to enable you to weigh your options. Read on for this insight.

The pros of an LLC are:

Easy Taxation System

An LLC business provides an easy taxation system since you’ll pay tax as an individual rather than a company. Here, your profits aren’t taxed as they would first go to the company’s owner. The owner should then file income tax returns personally. This process eliminates the lengthy tax-paying procedure of a company.

It’s also good to note that there’s flexibility with the taxation method to utilize for your LLC. The choice is often based on the number of members in your company or how you choose the government to tax you. You’ll most likely be taxed like a sole proprietorship if you’re a one-member company. If you have many members, you’ll be taxed like a partnership, where each will pay the taxes based on shares in the company. Paying taxes as a corporation is also an option you can choose.

Management Flexibility

An LLC formation allows for two types of management systems; manager-managed and member-managed. In manager-managed LLC, the owners hire or elect a manager or managers to manage the company on their behalf. For member-managed, the authority to manage the business lies with the owners.

The management flexibility allows you to seek expert management should you lack the skillsets or be too busy to handle the business processes. However, it’s important to note that you need to inform your chosen state secretary if you want to operate under the manager-managed system since most states recognize a member-managed system with LLC formation unless otherwise stated.

Asset Protection

Assets are a vital investment to both an individual and a business since they more or less represent the holder’s net worth. When running a business, many issues might arise, including lawsuits that could put your assets at risk of being seized by creditors. There are other business types where asset seizure includes taking your personal assets until a debt is covered if the business assets aren’t enough.  

Personal assets could be your home, car, cash in the bank, or investment somewhere. Fortunately, an LLC eradicates the possible loss of your personal assets. Should your business suffer a lawsuit, only its assets will be taken by creditors and not the individual ones.

No Limit In Membership

The membership of an LLC refers to ownership, whether as a partner or a shareholder. In LLC, there’s no limit to who can join your company. It means that the company can even be made up of one or two members or partners. This structure is beneficial for capital contribution; you can have a lot of capital if you have many members. On the other hand, LLC still has you sorted if you aren’t fond of working with many people.  

Moving on, the associated cons of an LLC are:

Dissolution Process

The dissolution process of an LLC is one of its major disadvantages, especially if it has many members. Should any members decide to leave, file for bankruptcy, or die, you’ll have to dissolve the company. It makes the business risky, especially if you have members who aren’t committed.

Luckily, you can safeguard your business to prevent unplanned dissolution by formulating a dissolution agreement. The agreement should include the situations in which you dissolve your LLC; it can supersede the basic dissolution procedure.

Business Type

The government does not permit all businesses and industries to form an LLC. Such industries include banks, insurance firms, and professionals such as architects and doctors. This limitation is often due to liability. Such professionals have vowed to serve the interests of the public. Therefore, should they fail to do so, they should fully face the law. For such industries, the only option is to form a professional LLC rather than a general one.  

Fewer Investors

In most cases, investors provide capital for the running of your business. As an LLC, you shouldn’t rely on investors to fund your business since they often shy away from LLCs due to certain conditions.  

One such condition is the tax payment procedure. As previously stated, the owners and stakeholders will be responsible for paying taxes individually with LLC. It may not sit well with most investors since they have to make payments whether or not they are paid dividends.  

Also, as seen in the discussion above, an LLC company has a less strict structure that can change depending on various factors. Investors may seek more rigid structures that are less risky to protect their investments.

Conclusion

This article has discussed the advantages and disadvantages of a Limited Liability Company (LLC.) As you weigh your business type options based on the information in this article, it’s essential to know that the formation of LLCs varies from state to state. Therefore, you need to do your research regarding your locality to ensure you don’t get on the wrong side of the law.