Whether you are just starting your business or you have already been operating a business as a sole proprietorship or general partnership, you may be wondering about the benefits of forming your business as a Limited Liability Company (LLC). Often business owners think that forming a business as an LLC is too costly or too time-consuming, and neither is the case.
The benefits the owners’ gain by forming their business as an LLC typically outweigh any perceived disadvantages. These benefits are, in many cases, unavailable to sole proprietorships and general partnerships.
Advantages of LLC formation include:
- Limited Liability – LLCs provide limited liability protection to their owners (who are called members). Typically, the owners are not personally responsible for the debts and liabilities of the business; thus, creditors cannot pursue owners’ personal assets, such as a house or car, to pay business debts. Conversely, in a sole proprietorship or general partnership, owners and the business are legally considered the same and personal assets can be used to pay business debts.
- Pass-through Taxation – LLCs typically do not pay taxes at the business level. Any business income or loss is “passed-through” to the owners and reported on the owners’ personal income tax returns. Any tax due is then paid at the individual level.
- Establishing Credibility – Forming an LLC may help a new business establish credibility with potential customers, employees, vendors and partners.
- Fewer Ongoing Requirements – LLCs face fewer state-imposed annual requirements and ongoing formalities than do corporations.
- Organizational Structure – LLCs are free to establish any organizational structure agreed upon by the owners.
- Few Ownership Restrictions – There are few restrictions on who can be an owner of an LLC or how many owners an LLC may have, unlike S corporations.
LLCs do not come without perceived potential disadvantages.
Potential disadvantages of an LLC include:
- Formation and Ongoing Expenses – To form an LLC, articles of organization must be filed with the state and the applicable state filing fees paid. Many states impose ongoing fees on LLCs, such as annual report and/or franchise tax fees. While these fees often are not very expensive for small businesses, formation of an LLC is more expensive than for a sole proprietorship or general partnership, both of which are not required to file formation documents with the state.
- Transferability of Ownership – Ownership in an LLC is often harder to transfer than with a corporation.
- Precedent – Because the LLC is a newer type of business structure, there is not as much case law and legal precedent for LLCs as there is for corporations.
For specific questions on whether the corporation is the best structure for your business, it is best to seek the advice of an attorney or accountant. Learn more about LLCs.