Pros and Cons of Forming an LLC

Category: Business Law, Tax

Last Updated: 20 Apr 2022

Pages: 7 Views: 865

Among the foremost choice an individual might encounter as a business owner might be, if at all or not to register his business or set up a limited liability company – LLC. (Evaluating Incorporating a Business or Forming a Limited Liability Company (LLC)) Setting up a Limited Liability Company –LLC has come to be an accepted choice in case of solely managed businesses and partnerships who have considered setting up a corporation with a view to safeguard one’s own assets. (Why More Business Owners Choose LLCs) LLCs pose a better option in case of corporations and partnerships as these are equipped with a lot of advantages of both.

A limited liability company, or “LCC”, therefore is a business which is not incorporated and has the twin features of a corporation as well as a partnership. This organization is especially appropriate in case of family businesses, professional licensees, non-US resident owners and businesses running overseas. (Incorporating Questions) An LLC is sometimes depicted as a blend of a partnership and a corporation. This is due to the fact that a LLC mixes the tax benefits and management adjustability of a partnership with the liability protection of a corporation. (Why More Business Owners Choose LLCs)

The benefits of forming an LLC remains that the members are given limited liability and have been charged taxes similar to that of a partnership. Through the formation of an LLC in place of a corporation, an individual avails of the entire spectrum of advantages of setting up a corporation, however one can stay clear from a few problems that one might face if he sets up a corporation. (For Entrepreneurs: Forming an LLC) The maximum advantage of forming a company or setting up an LLC lies in its scope to segregate one’s personal identity from one business, lowering the possibility of one’s own assets becoming implicated by business debts or lawsuits. The additional benefit comprises likely tax benefits, simpler access to capital funding, ownership secrecy and centralized management. (Frequently Asked Questions: About Incorporating)

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Particularly, at the time when an individual forms a corporation, he is taxed twice. This irritation is possible to circumvent, in case he sets up an LLC. The LLC permits more than one owner, or members. Moreover, a managing member is present, who also avails the benefits of limited liability and is naturally the person in charge of the management of the business. It is the proprietor’s personal income tax returns through which the profits or losses go through directly on their Form 1040.

The LLC books a Form 1065, and subsequently makes a record of every member’s taxable profit on Form K-1. To put in different words, the LLC itself never files taxes. This is the implication of avoiding double taxation with an LLC. In case of a corporation, it works in a different manner. Taxes are imposed on the corporation, and, consequently should file taxes. Subsequently, distributions to the proprietors are taxed. In spirit, the government charges twice from one’s revenues in place of once in case of an LLC as opposed to a corporation. (For Entrepreneurs: Forming an LLC)

LLCs possess a higher flexibility at the management level compared to corporations. (Why More Business Owners Choose LLCs) In case of setting up an LLC, two alternatives for organizing the management of the LLC are there: “Member-managed” or “manager-managed”. The proprietor of LLCs, those who are current members in the management of their business sometimes set up an LLC which is managed by the member. In case of LLC which is managed by the member, management authority and obligatory authority remains with all of the members or owners of the LLC.

“Manager Management” is the place in which one or more people irrespective of proprietors are chosen to shoulder responsibility for managing the LLC. The proprietors who are themselves not owners, at times family members those who have put in their money in the company just relax and share in the profits of LLC. In case of an LLC having a manager, simply the appointed managers possess a chance to vote on management decisions and function as the agents of the LLC. Managers may or may not also be members of the LLC. In some instances, the concern in a manager-managed LLC might be contemplated to be the securities with the condition that it is registered with the federal and/or state government. (Advantages of Forming an LLC)

An additional benefit of setting up an LLC is the safeguard given to the proprietors from personal liability in case of business debts and/or claims. Since, just LLC assets are made use of for meeting business liabilities, LLC owners become the loser of just the money which they have invested in the LLC. As against this, sole business owners and general partnerships give no limited liability protection in case of their owners- rendering the owners of sole proprietorships and partnerships to be liable in their individual capacities for every debt, claims and obligations linked with business.

Setting up an LLC can even be a big option for partners seeking flexibility in the means they share ownerships and profits. As against corporate shareholding whose ownership of stock and share of profits should be in percentage of their investment, partners in an LLC can normally share ownership in any manner they think it to be suitable. For instance, ownership of an LLC having two partners can be subdivided halfway in case they decide as such and in that case each partner might not have to pool half of the total capital investment. Besides, as against corporations, LLCs function somewhat unofficially. For instance, LLCs are normally permitted to function with no restrictions on the annual ownership and management meetings. (Advantages of Forming an LLC)

Nevertheless it continues to a good norm to conduct meetings and keep a record of decisions, however, no one is under any compulsion to act in that manner under majority of the state rules. Because of this, an individual can have considerably more time in his hand, placing one in charge of and when meetings are held, as one considers vital. Besides, proprietors of LLCs who are against accepting default tax classifications have the choice of choosing an independent tax classification. For instance, an LLC might choose to be taxed as a corporation.

This choice is made by submitting the filled in IRS Form 8832. An LLC which prefers to be imposed taxes as a corporation continue to reserve the legal features of an LLC under the rules governing LLCs in the state in which it is established, however it is considered as a corporation for purposed of taxes, put under corporate income tax rates and the same tax considerations related to conventional corporations. An LLC might also prefer to be taxed just like an S corporation. This preference is exercised by submitting the IRS Form 2553. (Advantages of Forming an LLC) Finally, as against corporations, it is not customary for LLCs to conduct an annual meeting and draft meeting minutes. (Why More Business Owners Choose LLCs)

But what is the reason behind everyone not joining the LLC brigade? Are there any demerits of an LLC? What is the reason behind every corporation in the world not getting converted to a LLC status? What are the reasons behind the continued formation of the conventional C corporations and S corporations? There are not many answers to that question. (For Entrepreneurs: Forming an LLC) To speak the truth, everything is far from being perfect. Some costs and problems arise from running an LLC. LLC possesses the demerits of being less popular.

The limited liability company is the latest arrival on the corporate scene. Even though this is changing fast, some individuals are not aware about LLC compared to a conventional corporation – which is something to think about when attracting investors and so on. (LLCs: Do They Make Sense for Your Business?) As a lot of companies will be looking forward to investment from outside sources and will be presenting stock options to employees, several angel investors and venture capital firms continue to be gun-shy regarding investing in LLCs as this is a new business set up that is hardly intelligible. (For Entrepreneurs: Forming an LLC)

An additional preference of the C Corporation over the LLC is that legal companies are poised to possess a lot more boilerplate accord for C Corporations compared to a LLC. Therefore, one might be incurring more legal expenses in the formation of an LLC as more time is required to be devoted by the lawyer during drafting agreements. Indeed, this will transform with the passage of time as greater number of business companies espouse LLC category. (For Entrepreneurs: Forming an LLC) LLC also face the demerits of higher costs incurred in banking. In case of accounts for small businesses or unofficial partnership, these are sometimes free, till an individual maintains a higher balance.

However a bank account in case of a limited liability company will possibly charge fees of $10, $20 or higher every month. LLC possess more intricate tax returns. An LLC will submit its own tax return in case it is running as a partnership firm, C corporation, or S corporation. This implies one’s expenses for tax return will be close to few thousand dollars annually. Besides, as documents in case of a limited liability corporation are required to be filed with the state, as against a general partnership, it implies tardiness to a little extent. (LLCs: Do They Make Sense for Your Business?)

To conclude, it might be held that LLCs are a superb establishment whose reputation is rising. LLCs are among the most adaptable business establishments available which are perfect in case of small or fresh companies. In case of a lot of new businesses, establishing an LLC implies the ideal of both scenarios. Akin to a partnership, taxes are imposed directly to the business, evading the double taxation problem with the corporations. Moreover, akin to corporations, LLCs present liability shield in case of owners and their assets.

Additionally, lesser concurrent needs and rules and regulations minimize the extent of paperwork and maintenance required to safeguard an LLC’s standing, thereby rendering them safer compared to corporations. But, LLCs is not everybody’s cup of tea, since it has its demerits too. It is important to know regarding the advantages of LLCs and also its disadvantages.

References

Advantages of Forming an LLC.

<https://www.hugedomains.com/domain_profile.cfm?d=mynewventure&e=com>

For Entrepreneurs: Forming an LLC.

<http://www.gaebler.com/LLC-Advantages.htm>