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Benefits of Forming a LLC
A limited liability company (LLC) is an
ownership structure that’s similar to a corporation.
In fact, it uses features of both partnerships (or sole proprietorships)
and corporations .
The advantages can be summed up as follows:
- It garners credibility with your clients
- You can deduct some kinds of expenses
- You can reduce your audit risk
- Your personal assets are protected through liability
protection
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It does take more effort to set up an LLC,
than it does a sole proprietorship or partnership, but once
it’s going, maintaining it is a great deal easier than
running a corporation. Here are the advantages of forming
an LLC in some greater detail:
- Taxation benefits. Any business profit or loss is
passed on to the owners, so that they pay the taxes
individually. The taxes are referred to the owners
in their personal income tax returns - so paying tax
at the business level is avoided in LLCs.
- Potential customer service. If you’re establishing
a new business, the most important task is to earn
credibility with potential clients, partners, suppliers
and staff. That’s more easily achieveable with
an LLC.
- Limited Liability protection. Just like shareholders
of a corporation, all LLC owners are protected from
personal liability for business debts and claims.
That means they’re not individually responsible
for any debts incurred during business dealings. Because
of this, the owners’ assets (such as land, or
other property) can’t be seized and sold to
pay the debts. In sole proprietorship, the owner is
entirely personally responsible for any loss or debt
and will have to use personal assets to settle these.
- Better than corporations. Even corporations are
liable for annual requirements and formalities imposed
by the government. Conversely, LLCs have fewer restrictions
and accountabilities.
- Organizational freedom. As opposed to corporations
and sole proprietorships, the LLCs are independent
in terms of deciding on their organizational structure.
- No restrictions. For an LLC, there are far fewer
restrictions than there are for an S corporation.
LLCs can have as many owners as they need.
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A word of warning: although LLC owners enjoy
limited personal liability for most of their business activities,
this cover isn’t absolute (and corporations are subject
to the same exceptions). An LLC owner can be held liable personally
if she or he:
Does something intentionally illegal, fraudulent,
or careless, that causes harm to another person or the company
- Directly and personally injures another person
- Treats the LLC as an extension of her or his personal
property and affairs, rather than as a separate legal
entity.
- Fails to submit taxes taken from staff pay
- Personally guarantees a business debt or bank loan
on which the LLC defaults
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Some of the disadvantages of forming an
LLC are as follows:
- Ownership Transfer. Contrary to the way it works
in a corporation, LLCs have narrower restrictions
on the transfer of ownerships. If you’re planning
on owning the business just in the short term, then
it may be better to rethink or research your options
further, before you decide to form an LLC.
- Initial expenses. State filing fees must be paid
for the formation of an LLC. Annual report or franchise
fees are also imposed by certain states – and
this is in the form of ongoing fees after the articles
of organization are filed with the state. Sole proprietorships
and general partnerships are exempted from filing
any articles and fees. This makes forming an LLC a
little costlier than forming a sole proprietorship.
- Lack of laws and regulations. As ‘LLC’
is a newly established form of business, there aren’t
many laws or standard legal patterns for LLCs in place
yet. In corporations businesses enjoy the benefits
of bylaws and standard laws. This makes LLCs little
more vulnerable.
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