Launching a small business is hard work and requires careful decision making. To build a successful company, you need to select a business structure that works best for you and your company. The structure you select will have long-term consequences on income, taxes and liability.
Understanding the advantages and disadvantages of a limited liability company (LLC) is an essential part of the decision-making process. Carefully consider whether an LLC can provide the most appropriate structure for you and your business.
Advantages of an LLC
Here are some advantages of LLCs to consider:
- Limited liability. An LLC provides separation between personal assets and the profits of the company. The company owns business debts. Any lawsuits against the business are limited to the assets of the business itself.
- Pass-through taxation. An LLC is a “pass-through” tax entity and is not subject to corporate income tax. Instead, net profits and losses of the business pass through directly to the income of members and are taxed as personal income. This means you may apply losses of the company against your personal income.
- Easy to establish with low start-up costs. There are a few simple steps you need to take to establish your LLC. To form an LLC, you must file an Article of Organization with the California Secretary of State and pay a $70 filing fee along with a $20 fee to file a Statement of Information. Annual fees to maintain your LLC amount to $80.
Disadvantages of an LLC
There are a few disadvantages to LLCs to also consider:
- Liability can be limited. Liability can have its limitations. Business and personal expenses need to be separated clearly. Otherwise your personal assets may be at risk. Additionally, any fraudulent activity at work can jeopardize your personal assets.
- Self-employment tax. LLC members pay self-employment tax contributions. It’s important to plan ahead and save money as profits are subject to Social Security and Medicare taxes.
- Raising capital. Many LLCs need to raise money to get started with their business, but sometimes there are limitations. LLCs can’t issue stock to raise funds. Because of the structure and pass-through taxation, investors may be hesitant to initially invest in your LLC.
As a small business owner, you need to consider all your options when it comes to forming your business. This is a decision not to be taken lightly. Seek legal counsel if you have questions or concerns over which legal structure best suits your needs and long-term goals.