A limited liability company (LLC) is an ownership structure that's similar to a corporation. The LLC uses features of both partnerships (or sole proprietorships) and corporations.
The advantages can be summed up as follows:
- It garners credibility with your customers.
- You can deduct some kinds of expenses.
- You can reduce your audit risk.
- Your personal assets are protected through liability protection.
It does take more effort to set up an LLC than it does a sole proprietorship or partnership, but maintaining it is a great deal easier than running a corporation once it's going. 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.
- 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 achievable with an LLC.
- Limited liability protection. 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 a sole proprietorship, the owner is entirely personally responsible for any loss or obligation and will have to use personal assets to settle these.
- Corporations are liable for annual requirements and formalities imposed by the states. Conversely, LLCs have fewer restrictions and accountability
- Organizational freedom. As opposed to corporations and sole proprietorships, the LLCs are independent in deciding on their organizational structure.
- For an LLC, there are far fewer restrictions than there are for an S corporation. LLCs can have as many owners as they need.
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 they:
- 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 their personal property and affairs, rather than as a separate legal entity.
- Fails to submit taxes payroll taxes.
- Personally guarantees a business debt or bank loan on which the LLC defaults.
Some of the disadvantages of forming an LLC are as follows:
- Ownership Transfer. Contrary to how it works in a corporation, LLCs have restrictions on the transfer of ownership. If you're planning on owning the business for a 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, which makes forming an LLC a little costlier than forming a sole proprietorship.
- Lack of laws and regulations. As 'LLC' is a newly established type of business, there aren't many laws or standard legal patterns for LLCs in place yet. Incorporations enjoy the benefits of bylaws and standard laws, which makes LLCs more vulnerable.