When you first decide to start your own business, you have a brief moment of excitement.
You’re playing images in your head of all the success you’ve achieved and how many records you’ve broken. You might even envision yourself at speaking engagements telling other aspiring entrepreneurs how you reached your success… But just as quick as your excitement came, it suddenly leaves you and you’re filled with anxiety and fear.
Experiencing both of those emotions is quite common and is to be expected. It’s a huge risk and undertaking to run an LLC but with any type of business venture, there is always going to be a bit of risk involved.
The question is, are you willing to take those risks? When it comes to business risks, the stakes can be incredibly high… you’re dealing with money.
Now, to be fair, you’re human and you’re going to make mistakes along the way but some mistakes are a lot more costly than others. You have to use your better judgment and not be scared to take those risks.
As the saying goes “scared money don’t make money,” so it definitely takes determination and letting go to build the fearless entrepreneurial reputation you need and long for to run a successful LLC.
Now, just as there are risks involved in running an LLC, the benefits of running one make all the risks involved well worth it all.
You just have to ask yourself if you’re ready to take the good with the bad. The great thing about it is that you don’t have to go it alone.
With LLC’s becoming more popular than ever before, there is obviously great things about it that outweigh the bad things. But still, in taking on such a responsibility, you need to know the good, the bad, and the ugly of running an LLC so you can make an informed decision on if it’s something you really want to do.
Take a look at the pros and cons.
Pros of Forming an LLC
Flexibility in Day-to-Day Operations: You Don’t Have to Do It All by Yourself
As an LLC member, you have the option to run the day-to-day operations of the business yourself or you can allow other members or managers to pitch in as well.
This aspect is especially helpful when you don’t have the proper training or experience in running a business. This allows you to receive help from those who do have the experience.
The great news is that it can be run by other members or non-members… whoever you decide to hire.
LLCs are not required to have a board of directors, strict book requirements, and yearly meetings.
This means that you will have enough freedom to run your business on your own terms. Moreover, you do not have to deal with a tiresome board of directors.
Limited Liability: You’re Personally Protected
As a member, you’re not personally responsible (liable) for the actions of the company. What does that mean?
That means that your personal assets and possessions like your car, house, and private accounts are protected from any creditors or institutions trying to collect any debts owed from the business.
The only way you can be protected in this way is if you keep your personal finances completely separate from your business finances.
LLCs are very flexible when compared with S-corps and C-corps.
You need to create an LLC operating agreement to determine how the LLC will be treated for tax purposes.
Failure to create an operating agreement means that your company will be under the default state rules. Because LLCs do not have strict requirements for compliance, this business structure is easier to form and maintain.
The IRS does not consider LLCs as separate entities during tax time.
This means that in the beginning, your company will not be taxed directly. Instead, you have to figure out how you want to be taxed.
The options are:
- Partners in an LLC – members choose to be treated like a partnership for tax purposes.
- Single member LLC – when it comes to taxes, this type of LLC is treated like a sole proprietorship.
- LLC filing as corporation – members choose to be taxed like a corporation.
Again, an operating agreement is important for determining how you want to be taxed.
Cons of Forming an LLC
“Piercing the Corporate Veil”
With limited liability, you’re personally protected from actions of the company that causes creditors to seek collection.
Well, there are some limitations to limited liability and this limitation is called “piercing the corporate veil.” This action happens when a judge rules that your personal assets and possessions aren’t protected by your LLC.
According to Harvard Law, there are three justifications for this act.
Two of the biggest ones are because you either failed to keep certain personal transactions separate from business transactions or you’ve engaged in fraudulent activities in running your business.
Read also: How to Protect Your Money
In corporations, the roles are straightforward but LLCs do not specify roles to the members. This makes it hard for the business as well as investors to know who is in charge or responsible for signing contracts.
You can avoid some of this confusion by creating an operating agreement at the beginning.
Starting From Scratch If a Member is Lost
With an LLC, if something happens to a member to where they leave the company, die, or files bankruptcy, the entire LLC has to be dissolved and the remaining members are obligated to take on the legal and financial responsibilities to shut down the business in its entirety.
This can be a huge loss for the remaining members but if they want to continue running a business, they’ll have to completely start a new LLC.
If you do not choose to be taxed like a corporation, your LLC will be subject to self-employment taxes.
What does this mean? Your profits will not be taxed at a corporate level. Instead, they will have to go through the members so they can account for them on their federal tax returns.
These taxes end up being higher than they would be when taxed at a corporate level.
Moreover, the individual members of the LLC will have to pay for federal items such as Social Security and Medicare. If you want to form an LLC, you should seek the help of a knowledgeable tax attorney.
For more information on LLCs, check out this infographic:
With the above advantages and disadvantages, you should be able to make up your mind about whether to form an LLC.
This business structure will give you the right combination of security and flexibility. You will be protected from personal liability and have access to a wider range of tax options.
Stock Photo from GaudiLab @ Shutterstock