There are many ways Limited Liability Company Benefits you if you have considered it over other business entities. Forming an LLC is undoubtedly a big step towards laying a strong foundation for your business. But how aware are you of the Advantages and Disadvantages of LLC? As several factors direct your business, many can turn down your hopes if you don’t choose the proper methods to up your business from scratch. Mind these advantages and disadvantages of a Limited Liability Company you need to know before proceeding further.
LLC refers to a business structure that offers limited liability protection and pass-through taxation. This type of business structure allows you to create a business as a separate entity. As an owner or shareholder, you can risk the investment but keep your personal finances protected in an LLC. Therefore, it’s a popular way to start up a business as it offers protection against business failures.
Any business debts will only have to be paid by the business entity, not the owner or the shareholders. Whereas in a Sole Proprietorship, you’ll be liable to pay any business debts in case of a failure, according to the state law.
LLC owners are not taxed as a separate entity as all the profits and losses are passed through the business to each member of a limited liability corporation. Members of LLC report profits and losses on their personal federal tax returns, just like the partnership owners do. Most private companies in the US follow this business structure as every starter can leverage more advantages of Limited Liability Company.
Compared to other business entities such as sole proprietorship, S Corporation, and C Corporation, the Advantages of LLC outweigh many disadvantages. These are:
LLC owners or the members are protected from personal liability for any financial losses that may occur to the business. Creditors cannot seize their personal assets to pay business debts. On the other hand, the sole proprietor's personal assets and general partners can be pursued against the business debts.
Owners of a Limited Liability Company can be individuals, partnerships, trusts, or corporations, and there can be any number of members. Forming other types of corporations such as S Corp are much more restricted in terms of the number of owners and shareholders; also, there is a maximum limit on the number of such.
The LLC owners can manage the business independently or opt for a management group to handle the corporation. On the other hand, other Corporations are managed by a board of directors, officers, and not shareholders.
Transferability of shares means you can also transfer your ownership rights to other shareholders. Any shareholder can transfer their ownership rights by simply transferring the shares to another person. If the current shareholder sells off owned shares, the buyer acquires the same rights as the previous shareholder.
As said above, a limited liability company continues to exist until the time it shuts down. Since shares are transferable, the shares pass on to the other shareholders or beneficiaries when the original shareholder passes away. This ensures that the company will continue to exist even if the original owner/s are no longer alive.
These types of corporations have a limited number of state-imposed compliance as compared to other corporation types. This feature is counted as one of the most significant advantages of Limited Liability Company. There are fewer formalities and taxes to deal with while forming an LLC.
With the profound benefits, come a few disadvantages of LLC while starting business. Although, many can be easily overcome. These are:
Creating an LLC company is a long process that involves specific state laws and regulations. There are multiple steps involved in Certificate verification, scrutiny, approval, and fee/tax payment.
Filing the forms can also be a daunting task, as you are required to visit the state/city clerk many times to get the proceedings going and get updates about the progress. Seeking professional help is always a considerable choice to avoid such legwork.
Compared to sole proprietorship, it is more difficult to set up a Limited Liability Company. You’ll have to register with Companies House and HMRC, besides paying basic charges and taxes.
More number of shareholders means more owners. These shareholders have a right to have their say in key business operations. Owners having conflict in opinions may turn the business process even more confusing and cumbersome. However, a sole trader runs as well as takes general decisions independently.
Added costs and fees are some of the major disadvantages of Limited Liability Company. It costs more create and maintain an LLC than a sole proprietorship business or general partnership. Many states also charges initial fee imposing taxes on other processes such as annual report or franchise tax fee.
Check State-wise Fee Details for setting up LLC
An LLC requires many compliance requirements to operate, ranging from bookkeeping to maintaining records of meetings, their minutes, and resolutions. Failure to comply with any measure results in heavy penalties and, in some cases, even imprisonment.
It’s a smart move to hiring a professional to keep track of such requirements to make sure all the compliance requirements are in order. Although, recruiting a separate accounting professional may cost you more.
Considering both the Advantages and Disadvantages of an LLC while setting up one is always a big move to make. Evaluate your preparations and paperwork, seek a professional expert to get things done for you, and save on the application process. Also, there are much fewer complications in bookkeeping if you give the responsibility to someone better.
Even when you're the only owner of an LLC, running it can be more costly than running a sole proprietorship or general partnership. There is an initial formation fee in every state. Many states charge annual reports and franchise tax fees as well.
The significant benefit is that it combines the advantages of other business models without any of their drawbacks. The LLC is easier to create than a corporation, but it also grants its members personal bankruptcy protection should the firm go bankrupt.
Starting an LLC is the most significant business structure for most small enterprises because it is inexpensive, simple to establish, and easy to run. An LLC is a smart option for company owners to preserve their own assets.
The owner saves a little bit of taxes by not paying payroll taxes on the amount received as an S-Corp distribution. However, according to their individual income tax bracket, S-Corp distribution business owners are taxed at regular, ordinary income tax rates.