Advantages and Disadvantages of Establishing a Limited Liability Company

Many individuals have chosen the Limited Liability Company as their form of business because of its ease in set up and operation. It differs from the sole proprietorship because it doesn’t leave the owners open to personal liability. It differs from a partnership in that it does not subject the owners to the consequences of bad legal or financial decisions by one partner. It differs from a corporation in that it does not have double taxation on profits. Let’s take a look at the advantages and disadvantages of setting up an LLC.

Advantages of Starting Limited Liability Company

– Limited Liability Companies, much like corporation, provide protection for their owners. If the organization has debts that it cannot pay, the individual owners will not be held responsible for those debts. If the organization has to file bankruptcy the individual owners are still not personally responsible for any of the liabilities that the organization has.

– Owners can choose to have profits distributed anyway they would like. This means, whatever percentage of profits they want to give to each member, they have the flexibility to do so.

– Reduction in paperwork. The tedious meetings and note-taking that are required by corporate entities are not required by an LLC. There are no board meetings or quarterly meetings required. There are no quarterly or semi-annual reports that are necessary for the IRS.

– There is no double taxation. You do not have to pay taxes on your corporate profits, as well as on profits that pass through to your members. You only pay taxes once, and that is on those profits that are given to individual members

Disadvantages of Starting Limited Liability Company

– Longevity of the company is based on the life of the members. The company will dissolve if a member goes bankrupt or passes away.

– This is not the best form of business to set up if you are planning on distributing shares later to shareholders. It is not the best business entity to set up if you are planning on going public.

– You may face new challenges in terms of the way that your organization files taxes. The LLC can be designated as other kinds of business entities when it comes completing tax returns, such as, a corporation, partnership or sole proprietorship. Of course selecting the sole proprietorship format would be the easiest to complete but you may not have a choice. This status may be automatically selected for you. Check with your tax advisor be sure.