Pros and Cons of LLC Formation

Limited liability companies (LLCs) are the simplest and most economical business structure in the United States. The pros and cons of LLCs include being easy to design and protecting owners from liability. However, LLCs also make obtaining money difficult and can misalign owner tax burdens and their income from the company.

Pros and Cons of LLC Formation

Pros of an LLC

  1. Limited liability

The biggest advantage of a limited liability company is right in the name — it limits your probable liability as a business owner.

Some probable liabilities that LLC owners can be shielded against include:

  • Unpaid business debts.
  • Vendor disputes: If they try to bill more than you incur.
  • Damages: If someone is hurt by your business or on the property you own.

2. Easy to create and administer

It is incredibly easy to create and administer LLCs. In most states, you can complete a new filing online in just a few time, paying with a credit card.

The specific steps you need to take in order to organize include:

3. No restrictions on the number of members or partners

LLCs can get started with any number of members or partners. Although single-member LLCs are common, you can also start an LLC with any number of partners or members — there is no restriction.

4. Unrestricted pay to members or partners

LLCs aren’t restricted in how they pay members or partners. They can also receive more or fewer tax write-offs for business-related expenses and compensations for expenses they pay personally through guaranteed payments.

Cons of an LLC

1. Licensing &filing fees

There is a fee to file a new LLC with a state — generally between $50 and $500. This is an addition to annual filing fees required to keep your LLC in good standing, which varies widely by state and range from $0 to $820.

These filings are controlled by individual state’s secretaries of state. Most can be completed online but mostly all have fees. Some have additional requirements including a registered agent, which charge additional fees in addition to state filing costs.

2. Required self-employment & excise taxes

In addition to filing fees, many states have dedicated businesses levies, excise taxes or franchise. If you create an LLC in another state where you don’t live or do business, you may be taxed on profit in that state. However, depending on the structure of your business, you may also be required to pay self-employment taxes on income, up to 7.5%.

3. Member salaries can misalign tax burden

The IRS doesn’t allow the LLC owners and members to collect salaries from their LLC. Members can still get money out of an LLC, but it’s in the form of draws — a kind of advance on profit-sharing. LLC members are taxed on their respective share of profits, regardless of any payments made to members or partners.

 

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