The Pros and Cons of LLCs

If you are a new business owner, one of your first steps should be determining which type of business formation you want for your business. The formation you choose will ultimately serve as the blueprint for your business and will have a significant impact on all future dealings and transactions, so it is important to choose wisely.

Advantages

• Limiting your personal liability - Unlike sole proprietorships and partnerships, your personal assets are generally protected from collectors if you have an LLC. This means that while there is a possibility that you may have to close your business one day due to debt, you will still have your house and other assets.

• Simplified tax filing - LLCs are ‘pass-through’ entities, meaning that company profits go directly to the members and will be taxed on members’ tax returns.

• Simple and cost effective - It can be fairly easy to create and maintain an LLC. Management and membership are both flexible, filing fees are reasonable, and the paperwork you need to file is minimal.

Disadvantages

• Costs - While costs are reasonable, an LLC does cost more to maintain than a sole proprietorship or partnership.

• Piercing the corporate veil - If you don't keep your personal assets separate from your business, there is a chance that you could be personally liable for business debts, even with an LLC.

• Self-employment tax - Unless you opt to be taxed as a corporation, the IRS will tax your LLC like a partnership. This can mean you will have to pay self-employment tax based on your business’s net earnings.

• Difficult to transfer ownership - Generally, all LLC members must agree to add a new member or change the ownership.

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