The potential pros and cons of starting an LLC – Look before you leap

When you choose the most appropriate entity for your business, this has got far-reaching impacts. The way you have to pay taxes on your business, your personal obligations and the type and amount of regulations your business will be subject to are dependent on the legal entity that you choose for your business. When it comes to the different legal entities for a business, a limited liability company or an LLC is the most common one.

LLC is a form of business entity which shares various qualities of an S corporation while also enjoying the flexibility, versatility and feature of less paperwork and documents. But this is nothing but an overview. Take a look at the potential pros and cons of forming an LLC and choosing it as your business’ best structure.

The advantages of setting up an LLC

FLEXIBILITY OF TAXES

As per the IRS, an LLC is not a distinct identity for purposes of tax payment. This will initially imply that the IRS won’t tax an LLC in a direct manner. Rather the members or owners of the LLC will be left to decide the way they wish to be taxed. Here are few options:

  • Single member LLC is a structure which is taxed in the form of sole proprietorship. The business’ profits and losses aren’t taxed directly but rather they are subject to tax from the member’s tax return which he files personally.
  • Partners in an LLC is another structure where owners elect to treat themselves as a conventional partnership for purposes of tax.
  • LLC filing as a corporation is where all the members of the organization can choose to file for taxes in a way they would if they were a corporation.

REDUCED PAPERWORK

As against S-corps and C-corps, when you form an LLC, it is extremely flexible. You will have your LLC operating agreement and hence you will be allowed to create rules which regulate your business. If you don’t do this, your company would have to abide by the state’s default rules. Requirements are less stringent and hence you have to comply with less paperwork.

The Disadvantages of forming an LLC

ROLE CONFUSION

Since corporations have specific roles, the LLCs don’t have it. This makes it tough for the investors in the company as well as the company to know the person who is in charge and who can sign contracts. If you create an LLC operating agreement, you can avoid some such confusion.

LIFESPAN IS LIMITED

In most jurisdictions, whenever a member departs from the LLC, the respective LLC stops existing. This is much unlike the way a corporation works where the identity remains unchanged even by the goings and comings of shareholders. This is why the LLC members fight against this weakness in an Operating Agreement.

Therefore, if you’re still not sure about the benefits and pitfalls of setting up an LLC, you can take into account the above mentioned points. Be aware of everything before you form an LLC.

 

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