Advantages and Disadvantages of Being a LLC
There are several different forms that a business can take. These include, corporation, S Corporation, LLP, Partnership, sole proprieter. The LLC is relatively new.
Here are some pros and cons of becoming one.
Advantages of an LLC
- No requirement of an annual general meeting for shareholders.
- Much less administrative paperwork and recordkeeping.
- Pass-through taxation (i.e. no double taxation).
- Limited liability (meaning that the owners of the LLC, called ""members,"" are protected from liability for acts and debts of the LLC)
- Using default tax classification, profits taxed personally (at the member level, not at the LLC level).
- Check-the-box taxation. An LLC can elect to be taxed as a sole proprietor, partnership, S-corp or corporation, providing much flexibility.
- Can be set up with just one natural person involved.
- Membership interests of LLCs in some states can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributons of profits/losses (like a partnership), without transferring the title to the membership interest (i.e., See VA and Delaware LLC Acts).
- LLCs in some states are treated as entities separate from their Members (See VA LLC Act), whereas in other jurisdictions case law has developed deciding LLCs are not considered to have separate juridical standing from their members (See recent D.C. decisions).
Disadvantages of an LLC
- Many states, including Alabama, California, Kentucky, New Jersey, New York, Pennsylvania, Tennessee, and Texas, levy a franchise tax or capital values tax on LLCs. In essence, this franchise or business privilege tax is the ""fee"" the LLC pays the state for the benefit of limited liability. The franchise tax can be an amount based on revenue, an amount based on profits, or an amount based on the number of owners or the amount of capital employed in the state, or some combination of those factors.
- It may be more difficult to raise capital for an LLC, as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual IPO.
- The possible lack of any operating agreement requirement can cause problems
- Short life span. Average life span of an LLC is 30 years because of death of one of the owners. In some cases this rule can be bypassed if there is a consensus among all the other members and it is spelled out in an operating agreement (Most states now allow LLCs to have perpetual duration (like corporations; although this may cause unwanted tax-related consequences with the IRS) and LLCs generally not to be dissolved as a result of the withdrawal of any one member).
- Some people, such as new businessmen or low-level clerks, may not be familiar with the LLC structure and may demand actions by Directors or by Shareholders or officers. While an LLC may establish something akin to a board of directors and can designate officers, it is not required to do so. Thus, a low level clerk's insistence on a signature of a President may require an LLC to appoint a President in order to get around the red tape. (Wikipedia)
Use the articles and resources on to determine if becoming a LLC is the best choice for your company.
Sample Articles
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