Essential LLC Facts that All Small Business Owners Should Know
A Limited Liability Company (LLC) is one of the most popular business structures for small businesses. If you’re considering forming your own LLC, make sure you’re well-informed about its pros and cons.
Before we get into the details, let’s understand what exactly an LLC is.
What Is An LLC?
LLCs offer features of both Partnerships and Corporations. They are treated as separate legal entities. In legal terms, this means that the personal assets and liabilities of LLC owners are separate from the assets and liabilities of the LLC.
LLCs are popular because they ensure limited personal liability for owners for the obligations and debts of the business.
Pros of LLCs
In this section, let’s take a look at all the pros of LLCs:
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Limited Liability
LLC owners enjoy restricted personal liability. Their personal assets cannot be dissolved to repay business debts and obligations.
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Less Documentation
Unlike Corporations, LLCs don’t need to hold annual shareholders meetings or prepare annual reports for yearly meetings. Owing to this, LLCs are one of the most convenient business structures.
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Tax Benefits
An LLC can be considered a pass-through entity. For an LLC with a single member, the overall income that the business earns gets passed to the personal tax return of the individual.
For LLCs that have multiple members, the taxation system is a bit different. Each member gets a part of the total income based on the percentage of ownership. They are all subject to self-employment tax.
An LLC that is taxed like an S-Corp is treated differently. In such a case, members don’t have to pay self-employment tax. Since they are employees of the LLC, they get a W-2. The LLC itself that is taxed like an S-Corp has to pay corporate taxes.
Disadvantages of LLCs
Here are the top disadvantages of running LLCs:
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Limited Life
Unlike Corporations, LLCs are not timeless. An LLC dissolves automatically when one or all of its owners dies. Similarly, an LLC dissolves in the case of bankruptcy.
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Costlier to Set Up
To form an LLC, you need to do state as well as federal-level filings. Additionally, you need to pay fees for state filing at the time of formation of your LLC. Subsequently, you need to pay this fee every year after that. Considering all of this, it may seem easier to form a Partnership or a Sole Proprietorship. You can also check out this DBA vs LLC comparison for more in-depth info.
Need help forming your own LLC? Opt for professional filing services like GovDocFiling to ease the burden on you.
For more information about LLCs, check out the infographic below:
