Business formation is using LLCs as a means of limited liability corporate entities, especially in the recent past. However, are they the right kind of structure for your business? With that in mind, seeing some of the pros and cons of LLCs (which could be a factor when choosing to start one) here are some of them.
Advantages of LLCs
Legal protection of personal property – When starting an LLC, business members are shielded from the personal responsibility of their liabilities. Also, it will save your household assets such as your house, car, and bank accounts, in case there is a legal battle against the business.
Tax flexibility – The LLC organization is not taxed, but the income earned by the organization is subjected to taxes. Net profit and losses are reflected on the personal tax returns of the members. This also enables the members of an LLC to escape from being subjected to two taxes on the same income from the business undertakings.
Less Documents – This is another major advantage of forming an LLC, and the fact is, when compared to a corporation, forming an LLC is much easier because you don’t have to worry about any sort of compliance formalities for the LLC or corporate formalities. This means that for small businesses, LLCs are easy to form.
Debatably, credibility & legitimacy – Using ‘LLC’ in your business name proves that your business is affiliated with a registered limited liability company.
Disadvantages of LLCs
Self-employment taxes – All the income received by the members of the LLCs is subjected to about 15% as self-employment tax rather than the payroll tax.
Limited operation span – The LLC’s business operations cease as soon as one of the members departs or dies. Succession and continuity as well as assets’ transition to future generations can be challenges. Corporations have uncertain liability.
Lesser funding opportunity - Due to the fact that they are considered pass-through entities, some financial institutions do not extend loans unless members provide personal guarantees. This makes financing more difficult than with corporations by decreasing the number of potential funding sources this makes financing more difficult than with corporations.
As you can see, LLCs have the next necessary protections but still have some certain limitations: There are benefits and demerits of forming an LLC and before you settle for any business structure, you need to weigh the advantages against the disadvantages when choosing between the two. In such a matter too, always it is advisable to seek advice from a tax consultant and also a lawyer.