Companies that are LLC: Everything You Need to Know
While LLCs have many benefits, they also have some disadvantages too.3 min read
Companies That Are LLC
Companies that are LLC offer many benefits. A limited liability company, or LLC, is a hybrid-type business structure that offers limited liability protection similar to a corporation and pass-through taxation benefits that are similar to a partnership business structure.
Advantages vs. Disadvantages of Forming an LLC
An LLC is the simplest type of business structure. Unlike a corporation, structuring and operating an LLC offers greater flexibility. While LLCs have many benefits, they also have some disadvantages too. Keep in mind that an LLC might not be the best choice for your business, particularly if one of your goals is to eventually become a publicly traded company.
Some of the key advantages to operating an LLC include:
- Pass-through taxation
- No residency requirement
- Limited liability protection
- Enhanced credibility
- Easy to form and maintain
Since the LLC offers pass-through taxation, the business itself doesn’t file a corporate tax return. Instead, the LLC owners (members) report their share of profits and losses on their personal tax returns. LLCs also provide that members need not be U.S. citizens or permanent residents of the United States, which is a requirement for most corporations.
Another key advantage to the LLC is the fact that it offers limited liability protection for its members, meaning they can’t be held personally liable for the business’s debts and obligations. Therefore, their personal assets, including their personal bank accounts, cars, homes, and other assets, are protected in the event of a legal suit against the business.
LLCs offer greater credibility, as vendors, partners, and financial lenders are more willing to do business with you if you form a proper business structure as opposed to conducting business personally with no business designation.
The LLC is also easy to form. Most states simply require that you choose a business name and registered agent and then file an Articles of Organization with the Secretary of State with the appropriate fee. LLCs are also easier to maintain, as they require fewer formalities and fees as compared to the corporate business structure.
Some of the disadvantages of operating an LLC include:
- Piercing the corporate veil and holding members personally liable
- Limited growth
- Lack of uniformity
- Self-employment tax
- Losses can only be used to offset other income to a certain extent
- Potential automatic dissolution of an LLC if a member wishes to leave the business, becomes disabled, goes bankrupt, or dies
While limited liability protection is a great advantage to the LLC, creditors could potentially pierce the corporate veil if any members engaged in fraud. The LLC has limited growth potential, as owners can’t issue shares of stock. Therefore, investors cannot take part in the LLC or help it grow as large as a corporation would have the ability to do.
The LLC also has a lack of uniformity, as it can be treated differently from one state to the next. Self-employment tax is also an issue with LLCs. Specifically, any LLC earnings can be subject to self-employment tax, particularly for appreciated assets. This happens if you convert your business to an LLC. Losses from an LLC can be used to offset other income of the business but only up to an amount that was invested in the LLC.
If an LLC member wishes to sell his or her interest, becomes disabled, or dies, the LLC might automatically terminate. The only way to prevent this is to draft a business continuation agreement that sets forth what will happen if any of these events occur.
Multiple Businesses Under One LLC
You might want to create several businesses under one LLC name, but this isn’t a good business choice. While you might save some time and money by paying one annual filing fee and filing paperwork for only one LLC, there is an increased risk, including risk with liability protection.
For example, if one of your businesses is sued, the assets of the other business could be at risk, especially since you are operating both businesses under one LLC. Since the income of each business isn’t separated from one another, the assets of both businesses are at risk of liability.
If you need help learning more about an LLC or how to form your LLC, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.