The business structure that you choose will have long-reaching repercussions. It affects your personal liability, the way you pay taxes, and the type of regulations that you will encounter.
Here are the advantages and disadvantages of LLCs:
Advantages of Starting an LLC
If you are wondering why you should form an LLC, for instance, New York LLC, here are some good reasons:
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.
LLCs provide protection from liability. This means that you will not be legally obligated to pay for court judgments or debts that the LLC incurs.
The creditors cannot come after your personal assets when your business is in trouble. This meaningful shield is not available in traditional partnerships and sole proprietorships.
Freedom in Management
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.
Disadvantages of Starting an LLC
If you are still on the fence, these disadvantages might help you to make up your mind:
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.
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.
In most states, when a member leaves the LLC or dies, the company will cease to exist.
On the other hand, a corporation remains unaffected by the joining and leaving of shareholders. You should address this weakness in your operating agreement to avoid problems much later.
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.