When you’re trying to figure out the best plan for your business, someone is bound to suggest that you form a limited liability company. Is that really the best idea?
Like most things in the law, the answer is, “It depends.”
Limited liability companies (LLCs) have a lot of advantages — but they also have some drawbacks. Before you decide on a course of action, you need to understand both.
LLCs offer the following decisions:
- It limits your personal liability from creditors if there are financial problems with the business
- It allows for a very flexible management style
- Owners can avoid extra taxation when profits are distributed
- You will have an easier time distributing the profits in varying amounts according to contributions
- It allows for better protection of your personal privacy
- They’re good vehicles for holding assets like real estate and stocks
- Compliance provisions are very slight
Essentially, LLCs are the most flexible business arrangement you can have with multiple owners. They allow you to customize your business right in your operating agreement. They’re also enduring. You don’t need to worry about the business entity surviving the passing of an owner or the sale of some shares.
LLCs do have some disadvantages:
- Profits are reported to the individual taxes of shareholders and owners. That means paying taxes at self-employment rates. Not everyone may appreciate that — it’s best to consult with a tax professional before you make a final decision.
- You may have a harder time engaging investors because of those tax consequences
- Some people don’t like the loose structure of LLCs because it can result in more operational conflicts
You can negate some of an LLC’s drawbacks by careful planning. Operational issues, for example, can be minimized with an operating agreement that anticipates growing pains in the company and addresses conflict resolution procedures.
Ultimately, there’s no automatically “right” vehicle for your business — there’s only what’s right for you
Source: allBusiness, “Pros and Cons of a Limited Liability Company (LLC),” accessed April 20, 2018
