When you launch a business, you’ll probably consider the option of forming an LLC. This stands for limited liability corporation, and it can be a great approach. But it might not be for you.
A limited liability corporation (LLC) is one of the simplest business structures, designed for startups that have few employees. It’s easy to form and inexpensive. It offers certain tax advantages, limits the liability you’re apt to face, and offers certain legal protections.
If you’re considering forming an LLC for your startup, you’ll want to know the best and worst aspects of taking that course.
Pro: Limited Liability.
One of the most obvious benefits is the limited liability on your personal name and assets. Whenever you start a business, you run the risk of your personal life being affected, especially if the operation goes under.
In the case of unpaid business debts, vendor disputes, damages, and other challenges that can take your company down, your personal name and credit will be protected. You can walk away from a failing company without a scratch.
That being said, it’s called “limited” liability for a reason: There are a few exceptions to the rule. In the case of fraud, failure to meet LLC requirements, mixing of business and personal funds, insufficient capitalization, and a few other situations, your personal name won’t be safe.
Con: Fees.
Though an LLC is one of the most affordable ways to incorporate a business, it’s not free. Licensing and filing fees generally cost between $50 and $1,500.
In the grand scheme of things, that’s not a lot. But when you’re starting out, it can feel overwhelming to put that much money toward a business you’re not 100 percent sure will succeed. You have to think about the long-term peace of mind offered by liability protection.
Pro: Easy to Create and Facilitate.
In most states, forming an LLC is as simple as filling out an online form and paying with your credit card. You’ll need your personal information ready to hand, and you’ll have to be ready to furnish the basic details of your business.
Many companies will form your LLC on your behalf for a small fee. You simply send an email will all the information attached, and you won’t have to think about it again until your LLC is issued. It’s as simple as that.
Once the LLC is in place, you’ll only have to hold a formal annual meeting, file an annual report, and complete any applicable tax forms. The company that filed your LLC can even do that for you.
Con: More Tax Forms to Fill Out.
You will have more paperwork to fill out during tax time. Even if you don’t have money coming in and going out, you must prepare K-1 forms for every member of your LLC. Each member also shows taxable profits that must be processed.
But this is only a drawback if you do your own taxes. If you hire a firm to do them, which is wise unless you’re a tax wiz, it will handle the extra paperwork for a nominal fee.
Pro: Tax Benefits.
And if you have someone else do your taxes, that means you may enjoy all the tax benefits associated with an LLC. When you’ve formed an LLC, you experience the greatest tax flexibility. Most small businesses, no matter how unorthodox, fall under the LLC tax umbrella.
If you’re a single business owner, your tax burden will be significantly lower. You’ll still be charged employment tax, but it’s more affordable than fronting the cost without being an LLC.
Also, an LLC is a pass-through entity, which means the profits from the business can go directly to members without being taxed first. You’ll process the taxes on your federal income taxes, which means a lower individual tax burden.
Con: No Wages for LLC Members.
As a member of the LLC, you are not allowed to draw a wage. Wages are one way that many new business owners pay their living expenses, even when they’re not profitable.
However, with an LLC, you’re not allowed to take any money until your business makes money. This isn’t unusual among various business structures, but it’s something you should be aware of.
When your business becomes profitable, those profits will be far more valuable than your wage, so most entrepreneurs find it’s better to wait it out.
Pro: No Numeric Member Restrictions.
LLCs don’t restrict the number of members or partners, which can be advantageous if you’re an entrepreneur who likes to dabble. Many business people in real estate, pharmaceuticals, branded retail products, and segregated product lines and services turn to the LLC because it distributes the responsibility and limits the tax burden.
The more partners you have, the more difficult the administrative aspect can be, but it can be comforting to know you possess the flexibility to make your business anything you want it to be.
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