While setting up a business, you’ll be faced with the tough question of choosing a company structure.
After all, there are numerous company structures out there such as sole proprietorships, partnerships, limited liability companies (LLCs), and corporations.
Among these, LLCs are fairly popular. The reason for this is that they combine the best features from both partnerships and corporations for your advantage.
To understand them better, let’s take a look at their pros and cons.
Advantages of LLCs
LLCs have many advantages. Let’s take a look at them.
- Taxation Advantage
When you establish an LLC, you have a great tax advantage. In single-member LLCs, the income flows from the LLC to the individual. This means that you’ll not be required to pay double tax for yourself and the company.
However, for LLCs with multiple members, you have to pay self-employment taxes. To avoid doing so, you can choose to be taxed as an S-Corp. This way, the members are treated as employees.
- Flexible Profit Distribution
LLCs also don’t have a rigid profit distribution system like partnerships. You can choose the profit distribution structure yourself without sticking to the 50-50 model. All you have to do is mention this structure while setting up the company.
- Easy to Set Up
LLCs are relatively easy to establish. The steps involved in establishing them are few and you just have to file your Articles of Organization with the Secretary of the State and pay the fees.
- Limited Liability
LLCs are called ”limited liability companies” because of this very feature. When you start an LLC, the company is treated as a separate entity. For that reason, the members will never be held liable for the liabilities of the LLC. LLCs borrow this feature from corporations.
- Ease of Managing
Unlike corporations, where you need to maintain formal meeting records and resolutions, LLCs are easier to manage. You don’t need to record minutes of meetings or resolutions.
Now, let’s take a look at some of the disadvantages of LLCs.
Disadvantages of LLCs
While LLCs have numerous advantages, they have some disadvantages too.
- Expensive to Run
While LLCs are easier to form when compared to corporations, it’s even simpler to form sole proprietorships or partnerships.
When you establish an LLC, you also need to pay the state filing fees every year. Additionally, you’re required to do both federal and state-level filings annually.
- Difficulty Going Public
If you intend to go public sooner or later, you’ll find it challenging if your company is an LLC. It’s better to opt for a corporation instead.
The same applies to getting investors and giving out employee shares.
Want to learn more about LLCs and how you can form one? Check out this detailed infographic below designed by GovDocFiling.