LLC’s: What Are They and What Are Their Pros and Cons?

In Business Tips, Business Transactions, LLC Formation by Larry DonahueLeave a Comment

Limited liability companies (LLCs) are popular due to their basic benefits of liability protection and are typically used by a company with two or more owners. LLCs protect the owners’ personal assets from losses, company debts, or court rulings against the company as long as the owners keep their debts and assets separate from the LLC. LLCs may also provide some tax benefits since they are taxed differently than a traditional corporation—or a C Corporation. An LLC can be used for a company of any size, such as a doctor’s or dentist’s office, or as an entity that owns commercial property. Before establishing an LLC, entrepreneurs should consider the various characteristics that are associated with forming an LLC, which include:

Ownership of an LLC

An LLC is allowed to have an unlimited number of owners, commonly referred to as “members.” These owners may be U.S. citizens, non-U.S. citizens, and non-U.S. residents. Also, LLCs may be owned by any other type of corporate entity, and faces substantially less regulation regarding the formation of subsidiaries.

LLC Business Operations

For LLCs, business operations are much simpler than other corporate structures, and the requirements are minimal. While LLCs are urged to follow the same guidelines as S corporations, they are not legally required to do so. Some of these guidelines include adopting bylaws and conducting annual meetings. For example, instead of the detailed requirements for corporate bylaws for S corporations, LLCs merely adopt an LLC operating agreement, the terms of which can be flexible, allowing the owners to set up the business to operate in the way they most prefer.

Management Structure of an LLC

The owners or members of an LLC are free to choose whether the owners or designated managers run the business. If the LLC elects to have the owners occupy the company management positions, then the business would operate similar to a partnership.  Or the LLC can elect to hire a manager to run the LLC.

LLC Taxation and Fees

Limited liability companies are taxed differently from other corporations. An LLC allows pass-through taxation, which is when the business income or losses pass through the business and are instead recorded on the owner’s personal tax return. As a result, the profits are taxed at the owner’s personal tax rate. Any profits, losses, or deductions, which are business expenses that reduce taxable-income, are all reported on the owner’s personal tax return. An LLC with multiple owners would be taxed as a partnership, meaning each owner would report profit and losses on their personal tax return.

LLC Pros

As stated above, an LLC gives the owner or owners limited liability, which means that each owner is not personally liable for any company related lawsuits or any debts that belong to the company. In other words, creditors cannot take or collect money from your personal assets to satisfy the debts of the business. Creditors are only able to take assets from the company. Of important note is that to ensure that the owners enjoy the full benefit of the limited liability they still must maintain the LLC debts and assets separately from their personal obligations and assets. Failure to do so could result in a creditor going after the member personally by alleging the LLC and the member are the same and hence the members should be liable to the creditor.

LLCs are simpler to establish and operate when compared to a corporation.

LLC’s also have tax benefits since the company’s income, or losses are reported on the owner’s personal tax return. This prevents the profit generated from the business from being taxed at the business level and also taxed again at the personal level when the owner takes a salary from the company. Instead, the profit from the business passes through the business entity and is only reported once for tax purposes on the owner’s personal tax return.

LLC Cons

LLCs can correspond with annual reporting requirements.  Additionally, if the members are separating or selling their interest in the LLC they will need to comply with the requirements of the operating agreement whereas often stocks have fewer restrictions on transfer.  LLC may have difficulty finding outside investors.

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