What Does an LLC Do for Me?: Everything You Need to Know
LLCs provide the advantage of limited liability to its owners, which means that they cannot be held personally liable for debts and liabilities of the company.3 min read
2. The Disadvantages of an LLC
Have you been wondering “what does an LLC do for me?” A limited liability company is similar to a corporation in that it is a separate legal entity and has its own legal obligations. An LLC can act as an independent business entity with its own bank account and tax identification number, all under its trade name.
LLCs provide the advantage of limited liability to its owners, which means that the owners cannot be held personally liable for debts and liabilities of the company. Even if the LLC becomes bankrupt, the owners' personal assets remain safe; they are not required to pay off the business debts using their personal assets.
Even though LLCs can be as useful as corporations, they are not bound by strict corporate regulations. There is no hard and fast rule for holding meetings of members and board of directors. LLCs are also flexible in the matter of taxation. They can create a favorable tax plan that works for them. Irrespective of whether it's a one-person enterprise or a multi-employee company, an LLC aids you in expanding your business. These distinct features have made the LLC business structure extremely popular in America.
Flexibility In Taxation
The IRS does not consider LLCs as a separate business structure. This gives them a lot of flexibility in the initial phase since they can choose the manner in which they want to be taxed.
An LLC can have the following taxation options:
- In case of a single-member LLC, the default tax treatment is like a sole-ownership, where all the business profits and losses pass through the owner's personal tax return.
- Owners of a multiple-member LLC can choose to be taxed as a general partnership firm, where the members file taxes for their respective share of income.
- LLCs can also choose to file their taxes as corporations, keeping the business income separate from that of their members.
Limited Liability of Members
The liability of members in an LLC is limited, and they can't be held responsible for the debts owed by the company. The creditors cannot lay claim on the personal assets of the members, even if the company assets are insufficient to repay their debts.
The paperwork associated with the establishment, functioning, and taxation of an LLC is remarkably less when compared to corporations. This not only eases the process of setting up but also ensures smooth functioning of business operations.
Despite all the above advantages that make LLCs such a luring business option, there are some disadvantages, as well, that you should consider and prepare to handle:
- Self-employment taxes: Unless you register your LLC as a corporation, you will be subject to self-employment taxes. This would mean that individual members would have to contribute to Medicare and Social Security taxes on their share of company profits. So, from a taxation point of view, an LLC setup can be beneficial only when self-employment taxes are less than the corporate income taxes.
- Confusion about roles and responsibilities: Lack of coherency in the positions of individual members often leads to unwanted confusion in the day-to-day business activities. At times, investors find it difficult to figure out the right person authorized to sign the documents. However, you can avoid this confusion by clearly specifying the roles of all concerned individuals in the operating agreement.
- Easily affected by members' exit: An LLC is unlike a corporation in the sense that a corporation remains unaffected by entry and exit of individual shareholders. However, in case of an LLC, if any of the members move out, it can terminate the existence of the LLC.
In addition to these disadvantages, you should always remember that like any other business venture, LLCs are prone to the risk of failure, too. You should take steps to prevent fallout from bad deals that may remove your personal liability protection. Operate a separate bank account, keep proper records, and don't mix your personal transactions with that of the business, even if it's a single-member LLC.
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