The Advantages and Disadvantages of Becoming an LLC
If you’ve been running a small business for a little while now, or if you’re just looking into what it takes to start one up, you’ve probably heard that you should be careful when choosing your corporate structure. One of these structures is an LLC, or a Limited Liability Company, which is popular with small businesses. Like anything though, there are some advantages and disadvantages to choosing this option.
Advantages of Becoming an LLC
1. You Aren’t Liable for the Company’s Financial Losses
If something goes wrong with the LLC, none of your personal assets will be affected, as long as you’ve kept them totally separate from your business.
2. You Don’t Have To Pay Taxes on the Business’s Profits
While corporations are taxed on their profits, LLCs aren’t. Instead, the profits go to the members and then they pay income tax. This system makes the taxpaying process easier, as well as making it easier to absorb losses.
3. It’s Easy To Become an LLC
Relatively speaking, registering your business as an LLC requires minimal paperwork and fees, making it more attractive to small business owners. Like any corporate structure, though, there are different requirements for each state, so it’s still a good idea to get some expert help.
Disadvantages of Becoming an LLC
1. The “Limited” in “Limited Liability” Can Be a Harsh Reality
While registering your business as an LLC can protect you from being liable for your company’s losses in many ways, it doesn’t give you total immunity. If you haven’t completely separated your personal transactions from the business (which is an easy mistake to make), you might still be held liable.
2. You Still Have To Pay Self-Employment Taxes
Because you’re still technically self-employed if you run an LLC, you’ll still have to pay the taxes that come with that. However, you can register your business as an S corp with the IRS, which means you only have to pay these taxes on your income instead of the company’s profits.
3. If You Lose One of Your Members, You Lose the LLC
Because an LLC is a partnership, if you lose a partner for any reason, the LLC is dissolved. You can start over, of course, but you and whatever partners you have left are responsible for ending the business and starting it again, which can get expensive quickly.
If you’re considering choosing an LLC as your corporate structure, take the time to thoroughly research and consider the pros and cons to be sure it’s the best option for you.