A limited liability company (LLC) is a business structure that protects its owners from personal responsibility for debts and liabilities incurred by the company. For this reason, owners don’t get pursued to repay company obligations or liabilities with private funds or assets. This may explain why many businesses prefer this structure out of the many options they have.
Related Post: 5 Pros and Cons of a Limited Liability Company (LLC)
Like any other business structure, LLCs must follow many rules and regulations often provided by the state. Naturally, these vary from one state to another. The company owners must present the necessary credentials for the state to append its certification as a functional corporate structure. You may want to read about how to create an LLC in Georgia or your specific state online to learn more about the ins and outs of this process. You can find many LLC formation services online.
But is the right structure for your business? This article provides the pros and cons prospective owners should consider before settling on an LLC.
Advantages Of LLCs
A limited liability company offers several advantages to its partners and investors, making it an excellent structure for your business. The most notable ones are:
1. Limited Liability
LLCs offer their owners a legal buffer against personal liability. This means creditors have no right to claim a company owner’s personal belongings and assets. They only have the right to claim company assets to settle debts.
In most cases, personal assets such as real estate and money in the bank are taken as liquid assets, which can be used to pay debts. An LLC circumvents these, saving the owner from greater losses. This is one reason why you might want to consider using this structure for your business.
2. Lower Taxes
Taxes are what gives a country its revenue. This comes from many sources, but most especially from businesses in the form of income tax. Although an LLC is typically considered a separate tax entity, the company’s profits aren’t taxed directly. Instead, the owners pay taxes individually, depending on the share of their earnings.
You pay taxes through your personal income and the net profits you accumulate as a member. It’s done at your individual tax rate based on your income bracket. This is a much more manageable scheme, especially for small startups.
3. Flexible Business Structure
Starting an LLC is easy and has minimal complexities. Costs and paperwork are significantly lower than in other structures. You’ll also be at ease running one since compliance is relatively easy to maintain.
Additionally, a limited liability company provides you, as the owner, with sole management of all the activities running in the company unless you have co-owners. Operating it is more relaxed compared to other business structures. Decision-making and implementing ideas on how the company should operate are much easier to do as a result.
But if you do require professional help, you’re free to consult an accountant or lawyer for support. Many specialize specifically in aiding LLCs with essential business choices, so you can never go wrong with having a dedicated one for your business.
4. Flexible Profit Distributions
A limited liability company offers great flexibility in distributing profits to owners. You can share profits based on each owner’s contribution. Alternatively, you can share profits equally or according to each owner’s involvement in the overall business.
In corporations, shareholders distribute profits based on the shares they hold. Business owners are also limited to how shares are allocated to each shareholder in the enterprise. Since every business owner needs to foresee a flexible profit distribution in the company, a limited liability company stands as one of the best in this category.
Partners, suppliers, and lenders may consider your business favorable when it’s a limited liability company. Stakeholders generally prefer working with businesses with formal structures, unlike sole proprietorships, which are viewed as more casual. Thus, with an LLC, you can quickly get funding from investors and credit from suppliers.
A significant disadvantage of LLCs is the difference in requirements between various states. Understand that LLCs are registered under the state, not the federal government. If your company operates in several states, knowing what laws to comply with may be challenging.
Another disadvantage is the difficulty in raising funds. If you choose to raise capital through selling shares, you introduce other members to the company, meaning you’ll no longer have complete control of the business’s operations.
When identifying the proper structure for your business, choosing one with lesser complexities and more flexibility is best. As seen from the above discussion, an LLC offers precisely this. Moreover, the advantages outweigh the disadvantages. If you’re convinced, you can start planning today.