Relatively speaking, LLCs are one of the newer entity choices that companies may be structured as. But just because it’s a popular entity choice doesn’t necessarily mean that it’s the right choice for you. So let’s explore some of the advantages and disadvantages of selecting an LLC.
But first, what is an LLC?
An LLC, or a limited liability company, is a unique entity type which combines different characteristics from other types of business entities. Just looking at its’ name gives you a better idea about what this means. The limited liability part is generally a characteristic of corporations which provide the corporation’s owners with protection from liability. Another characteristic that an LLC has is the way that it is taxed, but we’ll get into that a little later.
So what’s the deal with the “limited liability”?
Let’s start off by comparing other business entities. A sole proprietorship or a general partnership are business structures where the individual or partners are held liable for the general business, profits, and losses of the company. Now let’s look at LLCs and certain types of corporations. With these entities, the individuals are protected from liability and the company itself is liable for the business of the company. This is generally speaking and there are many situations where the individual owner may become liable.
And what about the taxes situation?
Here’s another aspect of an LLC that is particularly alluring to business owners. Again, let’s look at some of the other entity choices. Individuals in sole proprietorships and certain types of partnerships are only taxed once, also known as a “pass-through” tax. This is different from certain types of corporations which may be subject to double taxation. This occurs when the corporation is taxed and then the individual is also taxed. In certain states an LLC provides it’s owners with the choice of how to be taxed. These choices can include being taxed either like a sole proprietorship (or a partnership) or as a corporation.
Costs and Investors.
One of the downsides of setting up an LLC is the cost. Sole proprietorships and partnerships have minimal to no cost to set up. LLCs and corporations can cost up to several hundred dollars to set up depending on the state the company is being set up in. For some companies, this downside is offset by the fact that LLCs and corporations are attractive to investors whereas sole proprietorships and partnerships are generally not conducive to investors.
Decisions and Changes.
Business planning and selecting which structure is best for you and your company can be complex and there are numerous different issues that you need to consider before deciding which one is ideal for your situation. It is highly recommended that you discuss your business plans with a legal professional before making your decision. However, just because you have already chosen or even already set up your business as a particular entity does not mean that everything is set in stone. Depending on the state your business is in, changing the type of entity can easily be done.
So where does this leave us? LLCs can be very flexible and advantageous business structures depending on the state you are attempting to set your business up in and what your overall goals are. The topics discussed above are just a few of the issues to consider when choosing how to set up your business. Remember, planning, research, and knowledge are essential to the success of your company!