Home Business The Benefits And Risks Of Forming A Limited Liability Company (LLC)

The Benefits And Risks Of Forming A Limited Liability Company (LLC)

by Louise W. Rice
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If you’re looking to start a business, an LLC is one of the best options available.

It’s important to note that while LLCs are great, they also have their drawbacks. Therefore, whether it’s the right option for you will largely depend on business model compatibility. Also, you need to consider the fact that every state may have a different approach to how they treat LLCs. Therefore, you may want to do some research before forming an LLC blindly in any state or region. Below is a brief overview of the benefits and risks of forming an LLC.

Benefits

  • Limited Liability Protection

This is, perhaps, one of the most notable advantages of an LLC. This means that if your LLC runs a loss or can’t pay a debt, your assets are out of reach as far as settling that liability is concerned. 

Now, this advantage is crucial, especially for those who own riskier businesses or are simply starting in business. The sole proprietorship and partnership business structure doesn’t offer the same limited liability protection. So, if you’re concerned about the safety of your assets, LLCs are the way to go. You can find out more about protecting assets using Nevis LLC attorney or one from where you reside.

  • Pass-Through Taxation

Unlike corporate entities, which are, sometimes, taxed twice (double taxation), LLCs are treated differently. Corporations are taxed on company profits before distributing profits to shareholders, and after profits have been distributed. But, with LLCs, the net profits are passed onto each LLC member’s income tax returns, and that’s what will be subject to tax (based on the tax laws of the state you live in).

Why is this possible?  In the USA, at least, LLCs aren’t classified as separate legal entities for tax purposes by the Internal Revenue Service (IRS). So, as soon as you establish an LLC, pass-through taxation is the default mode of taxation for all the members. This is a significant advantage because you avoid double taxation. In essence, LLCs are taxed just like sole proprietors.

However, should the members of the LLC wish to do so, they could elect to be taxed by the IRS. Although it may not be a wise move, the option to choose is very desirable from a business standpoint. Choices give you a certain amount of freedom.

  • Flexible Management and Ownership Structure

flexible management and ownership structure

With LLCs, there’s no mandate on how an LLC is supposed to manage its business and devise an ownership structure. These are matters that are entirely at the discretion of the business owners or members.

The members could manage an LLC themselves, or they could appoint a manager to run the business for them. It’s also possible that an LLC could have only one member who runs the entity. 

Plus, unlike corporations, LLCs don’t have a restriction on the number of people who can be members of the LLC.

  • Few Formalities

There are way fewer formalities involved in operating an LLC as opposed to a corporation. For example, there are no mandates regarding the appointment of managers or directors, taking meeting minutes, and scheduling annual or biannual meetings.

Moreover, it’s relatively easy to create an LLC. There’s not a lot of paperwork required to create an LLC. So, if you want to skip the formalities, LLCs are a better option.

Disadvantages

  • Loss Of Limited Liability

Just because an LLC has limited liability doesn’t make it untouchable. But, if an LLC has poor business practices or is negligent, it could result in the piercing of the corporate veil, especially during litigation; thus, allowing the court to go after members’ assets. This could happen if the owners can’t separate company and personal accounts or comply with state regulations. If you don’t manage the business properly, you may face severe consequences.

  • Pass-Through Taxation

The problem with pass-through taxation is that whether or not owners receive dividends, they’re still supposed to report their income for tax purposes. The members are supposed to pay taxes based on the proportion of profit or loss that the business has made, regardless of whether or not it distributed any dividend or profit to any of the members. 

Mind you, in a corporation, shareholders or owners aren’t always taxed on profits. So, it could put the LLC members in a tricky situation. That’s why some LLCs then opt to classify their entities as a corporation with the IRS for tax.

  • Difficulty Obtaining Investors

Now, because LLCs are relatively looser than other business structures, investors are put off by this because it doesn’t guarantee a return on their investment. Investors are less inclined to put their money into an LLC as opposed to a corporation because corporate settings are good grounds on which investors can hold shareholders accountable, and they can influence how business is run. But with LLCs, those rules don’t necessarily apply.

Conclusion

Now, if you’re deciding if you should establish an LLC, it’d be best if you seek advice from a financial expert. LLCs have their pros and cons. But, for things to work out, you need to make sure that the pros outweigh the cons for your specific business. Also, consider the tax regulations in your state. Always try your best to seek a second opinion before rushing to decide because there are other business types to consider.

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