Information on LLC: Everything You Need to Know
Finding out information on LLC will help you to determine if it is the best business structure for your company.3 min read
2. Disadvantages to Choosing an LLC
Finding out information on LLC will help you to determine if it is the best business structure for your company. A limited liability company is a structure that allows protection from liability for its owners while combining the features and advantages of both a partnership and a corporation.
The specific business structures available and rules and laws that govern them vary by state, so knowing the state laws in which you plan to form your LLC is vital to forming it correctly and getting your LLC approved.
For example, some states such as North Dakota disallow LLC formations for industries such as banking and farming. Other states such as New York require formal publication notices of formation in local newspapers. To find out the requirements for your state, check with your state's corporation division or Secretary of State office.
An LLC typically has a managing member who acts as the head of the organization and is responsible for the management or supervision of named managers. This business structure is still considered relatively new compared to other structures such as partnerships and corporations. The LLC received its first permit to operate in Wyoming in 1977, with Hawaii being the last state to allow limited liability statute in 1997.
A more recent update to LLC law allows various series, which give LLCs the power to segregate their assets and liabilities in each series to protect one from the other.
Advantages of Choosing an LLC
Forming your business as an LLC has many benefits and is a popular choice for new business owners. Some LLC benefits are:
- LLCs can have as many owners or members as they choose. LLCs with only one member are taxed by the IRS as a sole proprietorship.
- An LLC may allow a "special allocation" for distributing profits and losses between members disproportionately based on the percentages of the individual owners.
- LLC owners enjoy limited liability, which provides protection for an owner's personal assets from being used to pay off business debts or settle lawsuits against the LLC.
- A managing member is considered an employee of the company and has their salary taxed as earned income, which prevents them from having to pay self-employment tax.
- In an LLC, members can take either distribution of profit or guaranteed payments, which can be as simple as writing checks from the business when they need it, provided there is enough cash available.
- Since these guaranteed payments represent earned income, members can enjoy the tax-favored fringe benefits that come with salaried payments.
- Since the managing member is an employee, they are allowed to deduct 100 percent of their health premiums up to their percentage of the company's profit, as it is an employee benefit.
- Corporations can act as members/owners of an LLC, which gives LLCs the ability to take ownership to another level and enjoy the fringe benefits of retirement plans held by the corporation.
- Members can add capital to the business or provide assets to the LLC or even loan money to the LLC. Members can then take payments out of the company for principal and interest.
- In the event of a members death or exit, an LLC can continue its existence if there is a unanimous vote from the remaining members.
- Since an LLC is considered a "pass-through" tax entity, the profits flow through the company and end up being paid on the member's tax returns.
- An LLC requires very few formalities and no strict annual meeting and reporting requirements.
Disadvantages to Choosing an LLC
While choosing an LLC has many advantages, you should consider the disadvantages before making your final decision. Some of the disadvantages of choosing an LLC are:
- A member's pro-rata share of the LLC's profits is subject to income tax even if they did not receive the distributions.
- Members' profits are not considered earned income unless they are the operating manager; therefore, they cannot take advantage of the tax-favored fringe benefits that the managing member can.
- An LLC risks dissolution if a member dies or declares bankruptcy. LLCs can also be dissolved for violations or filing agreements.
- LLCs cannot issue stock, so companies that anticipate going public in the future may find a corporate structure works best.
- An LLC can have more paperwork and be more complex than a sole proprietorship.
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