Advantages and Disadvantages of a Limited Liability Company (LLC)
Advantages and Disadvantages of a Limited Liability Company (LLC)
Grit is often the single-most predictor of success.
- Jonah Lehrer
A Limited Liability Company (LLC) is a legal business entity that combines the liability protection of a corporation, the operating flexibility of a
Partnership, and the tax benefits of a sole proprietorship. Though the rules for forming an LLC vary by state, it is a popular option for many start-up businesses.
Limited Personal Liability and Exposure
One advantage of an LLC is the limited liability shield, which protects the personal assets of its members. Creditors, typically, cannot hold members personally responsible for the debts and liabilities of the business. Members can only be liable to the extent of their business investment.
Pass-through Taxation
Though there are an array of tax options for a Limited Liability Company; an LLC is generally treated as a "pass-through" entity. Profits and losses pass through the business to the members and are taxed at the personal level. The business itself is not taxed. Reporting is done on members' individual income tax returns. No double taxation with both the company and the owner(s) paying taxes on the earnings of the business.
Operational Flexibility & Simplicity
An LLC is much less formal than a corporation. Record keeping and administrative procedures are not as onerous. There are no quarterly and annual meetings, or tax filings. Neither is there a board of directors.
Legitimacy
Registering a company as an LLC adds credibility to a business, and can help in brand building and marketing to potential clients and suppliers. In addition, the company can enter into contracts on its own, and also acquire property.
Disadvantages:
Higher Fees
An LLC typically pays higher filing fees compared to some other business entities or sole proprietorships. Additionally, some states require annual renewal fees or franchise taxes.
It is difficult for an LLC to attract additional investment because the company does not have the ability to issue stocks and bonds. Members have to finance its business activities, or take in private investors. Getting a loan can be tough, especially for small and start-up companies. The company may have to use its business, or personal, assets to guarantee business loans.
Fewer fringe benefits
Employees of an LLC who receive fringe benefits, for example, medical insurance and parking, must treat these benefits as taxable income. This is also true for employees who own more than 2% of an S-corporation. However, employees of a C-corporation do not have to report fringe benefits as taxable income.