Pros and Cons to Forming an LLC

What is an LLC?

You have a marketable skill or talent and want to start your own business. You have heard the term “LLC” before and you know it has something to do with small-business. You might even know that LLC stands for limited-liability company, but what exactly does that mean? There are a lot of questions would-be entrepreneurs may have about LLCs. What are they? Why are they needed? Should I form one? LLCs can be a great move for structuring small businesses for tax purposes and for liability protection. While they are relatively easy compared with S-Corps or C-Corps and flexible, individuals should seek professional or legal advice on forming one. Here are some pros and cons to forming a limited-liability company.

The Pros

• Tax Flexibility
  • LLCs allow those forming one to choose how the IRS will assess them for taxes. By creating an Operating Agreement, members can choose to be classified as an individual or a corporation:
    • Single member – business profits and losses are taxed through member’s personal federal income tax
    • Partnership – members taxed as a traditional partnership
    • LLC filing as corporation – taxed as a corporation
• Reduced Paperwork
  • LLCs are not typically paperwork-laden entities. With less members and compliance regulations than traditional corporations, keeping track of forms and legal standing is easier
• Limited Liability
  • As the name pertains to, LLCs ensures members with liability protection. Members are not held liable for debts or legal action taken against a limited-liability company

The Cons

• Personal Income Tax
  • Electing to be taxed as a single member LLC means paying more than traditional corporations in income tax. Income is recorded as self-employment tax, meaning it is subject to individual taxes like Medicare and Social Security.
• Role Confusion
  • LLCs do not generally outline controlling officers or specific company roles. Without an Operating Agreement outlining these roles, it may be difficult for investors to identify officers or who is authorized to sign contracts.
• Life-Cycle
  • Unless properly addressed in the Operating Agreement, when a member leaves or resigns from their role, the LLC becomes defunct.

These represent just a few pros and cons to forming an LLC. If you are interested in forming one, you should seek professional legal counsel. Savage Villoch, PLLC has specialized experience in forming all types of business entities and can provide the tools and resources for forming a successful limited-liability company.