1. General Information About an LLC
2. Advantages of Forming an LLC
3. Disadvantages of Forming an LLC
4. FAQs

Advantages of an LLC are plentiful as it shares some of the benefits of an S corporation or a C corporation while retaining flexibility within its business structure. You'll have better control of an LLC and some of the benefits a corporation receives regarding tax and liability.

General Information About an LLC

  • When you form an LLC, you must file the necessary forms with the state, including Articles of Organization
  • At this time, there is no tax category specific to an LLC designated by the IRS. Other tax categories are used instead. 
  • When determining an LLCs tax rate, it is based on the owner's total income.  
  • An LLC is easy to form and to maintain a positive legal standing. Requirements are less stringent for compliance issues. 
  • Many states do not require an LLC to file an annual report.
  • An LLC Operating Agreement is an important piece of the business structure that allows an owner(s) to create the operating rules and procedures that will govern everyday business operations. 
  • LLCs that do not have an Operating Agreement in place will follow the default rules set by your state. 

Advantages of Forming an LLC

  • With an LLC operation, members (owners) are protected from liability. They are not responsible for debts or legal judgments associated with the LLC. 
  • A creditor is prohibited from attempting to attach personal assets from owners of an LLC. The same protection is not applicable to a sole proprietorship or partnership
  • LLCs offer pass-through taxation with no restrictions imposed on the type of owners or the number of owners allowed. 
  • An LLC does not have a formal structure like a corporation. This allows owners to have more options and flexibility in making decisions about how the business operates. 
  • For small businesses and LLCs, adaptable business structure is an appropriate choice. 
  • There are no stringent rules about the way an LLC distributes its profits. They do not have to be distributed equally among the owners or according to the percentage of how much a member owns of the company. 

Disadvantages of Forming an LLC

While an LLC offers many advantages, there are a few disadvantages to consider.

  • If an owner chooses not to create an Operating Agreement, this can lead to confusion about what role each owner is assigned to and what they're responsible for. It can result in investors not knowing who to contact if they're interested in funding the LLC. 
  • Owners of an LLC are required to pay self-employment taxes.
  • An LLC can have limited life in some jurisdictions that require the LLC to cease operating should one of its members leave the LLC. This is another reason to have an Operating Agreement outlining the rules that will govern the LLC. 
  • An expense for an LLC is the Articles of Organization that must be filed in your state along with filing fees. 
  • You may be required to pay ongoing fees such as franchise tax and annual report fees in some states. 
  • Should you choose to form an LLC, know that the cost is more expensive than forming a partnership or sole proprietorship. Neither of these options requires filing documents with the state. 
  • Transferring ownership of an LLC can be a difficult process.
  • To add new owners or make changes to the percentage of ownership for its existing owners, all owners must be involved in the approval process. 

FAQs

Q. How will my LLC be taxed if I am the only owner?

A. The taxes for your one-owner business will be a sole proprietorship.

Q. Is the tax status different if there is more than one owner of the LLC?

A. Yes. A multi-owner LLC is taxed as a partnership.

Q. What is pass-through taxation?

A. With an LLC, the net income of the business is "passed-on" or taxed on personal tax returns of the owner(s) whether the return is filed as a sole proprietorship or a partnership. 

Q. Which tax forms are used for a sole proprietorship or a partnership?

A. A sole proprietorship uses Schedule C to calculate the business tax and the business income is combined with other income earned by the owner on the individual tax return. A partnership uses Form 1065 and Schedule K-1.

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