What is a Limited Liability Company?
A company is an entity that can act as a separate person in business dealings. A limited liability company (LLC) is one form of company and has characteristics which make it particularly attractive to many businesses, including small businesses. This article will outline the benefits of an LLC for your business, as well as some potential drawbacks. It will also discuss how you might go about forming one if you decide this legal structure for your business would be advantageous.
The advantages of starting an LLC
Protection: Many small businesses are turning to Limited Liability Corporations (LLCs) for protection. A limited liability company is more affordable then a corporation and offers the same personal liability shield as it does. This prevents business owners from being in trouble with their creditors when they’re managing their finances, which makes this solution quite attractive.
Pass-Through Federal Taxation on Profits: An LLC doesn’t consist of multiple shareholders and, as such, the profits or losses of the company will pass directly through to the owners. This means that only one level of taxation needs to occur before owners receive their profits. This can be rather beneficial when it comes time for distribution of gains. No double taxation!
Management Flexibility: When you form a corporation, there are specific rules in place as to how you’re going to manage your business. With an LLC, however, things can be more flexible. Owners can participate in management decisions and they can also choose not to participate while still maintaining ownership interest in the company. Legal protections won’t be affected by this participation because an LLC doesn’t have voting shares like a corporation does.
Easy to start and to maintain: Forming an LLC isn’t a complicated process and it’s easy to maintain. It won’t cost you a lot of money to start up your business in this way and the same goes for maintaining it, which is why many small businesses are turning to LLCs.
The disadvantages of starting an LLC
Requirement to File Annual Reports: You are required to file an annual report with the state in which you are located and by the IRS. Annual reports must be filed approximately 8 months after your LLC is established. Failure to file an annual report can lead to fines and penalties with the state and federal governments as well as other additional problems.
Limited Liability: Owners of a limited liability company do enjoy protection from creditors, however this protection is not perfect. There are circumstances where personal assets can be subject to repossession or seizure by creditors for company related debts, so it’s important for owners to keep track of their liabilities and assets when they’re conducting business in this way.
Not all States Recognize LLCs: Only a few states recognize LLCs; however it’s becoming more and more common for even the remaining states to recognize LLCs as an entity. You may want to check with your local governing bodies before you begin this process, just to make sure you’re doing it in a legally acceptable manner.
Annual Filing Fees: An annual report must be filed within 8 months of obtaining your limited liability company status and filing fees will need to be paid at this time. These costs are typically nominal but they can add up if you don’t keep track of them or pay attention to them when they come due. Failure to pay these fees can result in additional fines or penalties.
In conclusion, if you’re considering forming an LLC for your business, it’s important to weigh the pros and cons of this legal structure. While there are many benefits associated with limited liability companies such as protection from creditors or lower levels of taxation on profits than corporations, there are also some disadvantages that need to be considered as well. For instance, owners must file annual reports with state officials and by the IRS which can result in fines and penalties for noncompliance while not all states recognize LLCs at present time. Many small businesses have found success operating their company under a limited liability model however so now is a good time to consider whether this would work best for your own business needs!