What is a LLC?
A LLC, or limited liability company is a type of business structure that is generally allowed by state statutes. Since it is administered on the state level, it is advisable to check with your states requirements if you are interested in starting or converting a business to a LLC.
As the name suggests, LLC’s offer limited liability to owners, a trait which is usually found with corporations but also allows for pass through taxation which partnerships get to enjoy. With these advantages LLC’s generally face higher startup and operational costs. This article will focus on the advantages and disadvantages of LLC’s.
Limited Liability - Similar to corporations, LLC’s get the advantage of having limited liability. If the business is sued or is unable to pay its debts, it is just the LLC that is at risk of losing assets. Meaning owner’s personal property is not at risk. While this is a distinct advantage for forming an LLC, it should also be noted that there have been instances of single member LLC’s whose limited liability have been “pierced” making personal assets at risk.
Pass through taxation is another area where LLC’s have an advantage. They are not subject to double taxation like corporations are. When multiple member LLC’s are first set up they are federally treated as partnerships, if it is a single member LLC then it is treated as a disregarded entity for federal tax purposes. It is possible for a LLC to elect to be treated as a corporation with Form 8832 and unless it then elects to be treated as an s corporation, it will be subject to double taxation.
With additional paperwork to be filed typically with the Secretary of State which the LLC is formed usually comes additional startup and annual fees. This can be looked at as a disadvantage for the business but the benefit of limited liability is usually worth the additional time and money to run an LLC, particularly if your business is at a higher risk of lawsuits or debts.
The operational costs of an LLC are also apparent. It is highly advised that a LLC put in order a LLC operational agreement. This is similar to a partnership agreement in that this should spell out how things like profits, decisions and members are handled. This agreement may need to be amended in the future this can cost time as meetings will be required when the agreement needs updating.
In many cases, the limited liability that LLC’s bring can have many advantages for smaller sole proprietors or partnerships. However, with the additional paperwork and filings, it may be more beneficial for owners to seek the s corporation election in the long run.
As previously mentioned, you will want to check with your states requirements and statues for forming and operating a LLC.