If you’re thinking of starting your own business, you need to be familiar with the concept of a Limited Liability Company (LLC). Think of this kind of company structure as a hybrid. It has a combination of features of Partnerships as well as Corporations. Just like in Corporations, you get the advantage of limited liability protection. On the other hand, they include flow-through taxation like in Partnerships.
If you’re planning to form your LLC, you can get a lawyer to handle the formation part Alternatively, you can opt for professional filing services like GovDocFiling, which can do all the work for you, quickly, easily, and for a very low cost compared to a lawyer.
But before you take the first step, make sure you are aware of the pros and cons of LLCs.
Advantages of LLCs
LLCs are easy to form and are relatively inexpensive. Since they offer limited liability, each of the members isn’t personally liable for debts that the LLC takes on. When it comes to profit distribution, you have room for flexibility. The profits do not necessarily have to be divided equally. What’s more, you do not need any formal records of meetings or resolutions.
But that’s not all.
The biggest benefit of LLCs is related to taxation. For Corporations, tax is levied twice — once on the entity level, and again at the individual level. LLCs do not have this double taxation system. LLCs are pass-through entities, so for a single-member LLC, the income earned in the business is passed through to the individual’s personal tax return. For multi-member LLCs, the taxation defaults to being taxed as a partnership in which the income passes through to each owner at their respective ownership percentage. But then, they are also subject to a self-employment tax.
Members of an LLC that is taxed as an S-Corp do not pay self-employment tax due to the fact that they’re employees of the LLC and earn a W-2. Instead, the LLC taxed as an S-Corp is subject to corporate taxes.
Disadvantages of LLCs
Unlike corporations, LLCs are not designed to last forever. In case of bankruptcy or the death of a member, the LLC gets dissolved. Even though LLCs are easier to create and maintain in the long run, they do require you to take care of state and federal-level filings. Plus, you need to shell out the fees for state filing when you form your company and for each year after that. If you take these things into consideration, it may seem simpler to opt for a Sole Proprietorship or even a Partnership.
For companies that have investors, want to go public, or are interested in issuing employee shares, LLCs are not a great option, and instead, you would want to explore constituting a legal corporation.
How to Form an LLC
To form an LLC, the first step is to get your LLC EIN (Employer Identification Number). Next, you need to file the Articles of Organization. Additionally, you are required to make an operating agreement. It should outline all the functional and financial frameworks related to your business. Along with it, you will also need to pay some fees for filing the articles.
Want to know more about LLCs? Check out the infographic below.