LLC Pros and Cons: Everything You Need to Know
LLC pros and cons should be considered before setting up the business structure. 3 min read
LLC pros and cons should be considered before setting up the business structure. An LLC has pros such as flow-through taxation and limited liability protection. However, there are also disadvantages such as the legal process of “piercing the corporate veil” and being forced to dissolve the LLC if a member leaves.
What Is a Sole Proprietorship?
A sole proprietor is defined as a person who runs their business on their own and is the owner. This business type is unincorporated. Know that if you elect to become an LLC, you don't have the sole proprietorship any longer. The structure of a sole proprietorship is very easy to understand.
- There isn't any need to submit a formal document to establish your sole proprietorship.
- You remain a sole proprietor if you sell your services alone. For example, if you're a copywriter working by yourself, you're a sole proprietor.
- Regarding taxes, there isn't a difference between you and the business you own, so you're taxed a single time as one entity. This involves using a Standard Form 1040 and a Schedule C.
If you have decided to go into business alone, a sole proprietorship is ideal. What are the sole proprietorship advantages? You get to have complete control of the business. There are no complex legal agreements to determine ownership with a sole proprietorship, unlike an LLC.
What Is an S Corporation?
An S corporation is taxed by the federal government in a specific way. An S corporation is treated as a pass-through entity by the IRS, but what does that mean exactly? S corporations are capable of distributing stock just as a corporation does. S corporation owners are shareholders and enjoy liability protection just as an incorporated business does.
Essentially, this means that if something bad happens in business, it will not affect your personal bank account or any shareholder's bank account. The sole proprietorship and the S corporation are not the same but share commonalities. S corporations don't involve “double taxation” on individuals and the corporation, every shareholder is subject to their own individual tax rate.
What Is a C Corporation?
A C corporation is taxed entirely apart from the owners. Businesses are incorporated differently in all 50 states. It is a requirement for all C corporations to produce financial statements. Regarding a C corporation, the business owners and the corporation are taxed completely separately.
Shareholders of an S corporation are taxed individually based upon their shares. When the business has to deal with legal issues or debt, the owners are not held personally liable. Generally, it's good that a business owner can have a business that is a separate entity from themselves. Owners are able to obtain capital through the selling of stock. Employees can receive stock benefits buying at a fixed-in price.
LLC: The Pros
A Limited Liability Corporation has the ideal characteristic of flow-through taxation of income — the business' income is a part of the business owner's income without a separate tax. A limited liability company allows the owners to keep their personal property separate from the business and protects all assets from creditors-cars, bank accounts, investments, and homes are protected. Members of the LLC remain protected as long as personal finances are kept separate from business.
There is a process referred to as “piercing the corporate veil,” which prevents members of the LLC from always relying on this protection. This occurs when members are held liable for illegal or fraudulent acts. The court pierces the veil and holds members accountable — this is an area of law that is frequently changed or expanded upon. Taxes are easier to file with an LLC than with a corporation.
LLC: The Cons
An LLC has its limitations as well. For example, a judge ruling can determine that your LLC doesn't protect your personal assets. As mentioned before, you can put yourself at risk of “piercing the corporate veil” if you don't distinctly separate your personal assets from your business or if you operate in a fraudulent manner that resulted in losses.
To the IRS, LLCs and partnerships receive the same tax treatment unless members choose to be taxed as a corporation. There are situations that would cause an owner to dissolve the LLC, such as if a member leaves or goes bankrupt — remaining partners are to handle legal and financial obligations in order to eliminate the business.
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