1. The Advantages of LLC Status
2. The Disadvantages of LLC Status

Can you get your LLC online? A limited liability company (LLC) is the legal status of a business entity that combines the limited liability of a corporation with the taxation and flexibility of a partnership. Owners of an LLC are referred to as members. A single individual, multiple individuals, corporations, or other LLCs can be members of another LLC. The members of an LLC are responsible for all aspects of the LLC.

An LLC is structured according to the state laws and guidelines. Single-member LLCs are typically taxed as sole proprietorships, which means that the profits and losses “pass through” the member's federal tax return to the IRS, via the Form 1040.

If there are multiple members of the LLC, then it's known as a Multi-Member LLC, which means it's taxed as a partnership and the profits and losses pass through to the members' personal tax returns.

  • Members of an LLC can choose to be taxed as a corporation, rather than a partnership. 
  • LLCs can choose to be taxed as a C corporation, with the profits and losses reported on tax form 8832
  • LLCs can choose to be taxed as an S corporation, with the profits and losses reported on tax form 2553.
  • LLC ownership is usually defined by percentages, instead of the shares of stock usually seen with a corporation.
  • LLCs are also taxed on the state level, which can vary by state.

Financial institutions like banks, trusts, and insurance agencies aren't eligible to be an LLC. LLC industries can be limited in certain states as well. Professional services that require licensing, such as doctors and lawyers, usually need to form a Professional LLC or a PLLC. A few states also require that members or managers be 18 years old, at least.

A registered agent is required to form an LLC or register to conduct business in a different state. This process is known as foreign qualification.

The Advantages of LLC Status

  • An LLC is the simplest business structure
  • Corporations are taxed entities, but LLCs have all their profits and losses passed through to their members. Like a corporation, the members' assets are exempt from liability from the business.
  • An LLC is also easier in that it's not responsible for much of the same paperwork as a corporation, and its registration costs are lower. The members can have any number of meetings and can document whatever they please, though there's no requirement.
  • LLCs are also free to design any organizational structure they choose, provided it's agreed upon by the owners.
  • LLCs can have many classes of ownership, whereas S corporations are limited to one class.
  • There are limitations on who can be an LLC owner, however, and how many owners an LLC can have.
  • Members are free to divide the profits however they choose.
  • The LLC is registered with the state, which means it bears the LLC suffix that fosters trust in customers.
  • Registered LLCs own the rights to the name, which prevents others from using it.
  • You don't have to be a U.S. citizen or permanent resident to begin an LLC.

The Disadvantages of LLC Status

  • State laws require that LLCs are dissolved if any members withdraw from the agreement, in many cases.
  • While business taxes are removed, an LLC that becomes profitable could cost members high self-employment taxes.
  • There is limited growth, due to the fact that members can't issue stock to investors like you would with a corporation.
  • If a member leaves the LLC, it will most likely be terminated and no longer exist.
  • Tax recognition on assets could occur if you switch a current business to an LLC status.
  • LLCs can be regarded differently in different states, which causes a lack of uniformity.
  • Though it's cheaper to start, LLCs do have several fees that raise the initial start-up cost above what a sole proprietorship or partnership would be responsible for.
  • The business and personal finances need to be kept separate, which requires business accounts.
  • As the owner, you need to keep strict records of expenses that don't mix with your personal finances.

With so many business structures, it can be overwhelming to determine which is right for your business needs. If you're in doubt, contact a business or corporate attorney to get some guidance.

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