What is an LLC?
The official name for an LLC's owners is "members," and it can have one or many of them. An LLC can have as many members as it wants, whether they are individuals or other businesses. Members' personal assets are shielded from the business's creditors with an LLC structure.
Many businesses in the United States identify as LLCs. So that you can choose the best business structure for your company, here are the advantages and disadvantages of an LLC.
There are a number of advantages to structuring your business as an LLC.
Members of a limited liability company are not personally liable for the company's actions. This means that creditors who want to collect money from the company are protected from the members' personal assets, such as their homes, cars, bank accounts, and investments. As long as you keep your personal and business finances separate, this protection remains in effect.
Profits are taxed by the federal government through a pass-through entity, which means that unless the LLC chooses otherwise, its profits are not taxed at the company level. Members, on their own federal income tax returns, instead pay tax on profits.
This makes it easier to file taxes than if your business were taxed like a corporation.
You and other members can share the burden of a loss on your own tax returns and reduce your tax liability if your business experiences one.
» MORE: Best LLC business loans Flexibility in management An LLC can be managed by members, allowing all owners to participate in the day-to-day decisions of the business. The business can also be managed by professional managers, who can be members or outsiders. If members want to hire people with more business experience, this is helpful.
Unless specifically stated otherwise in filings with the secretary of state or another equivalent agency, an LLC is member-managed by default in many states.
Easy to set up and maintain An LLC's initial paperwork and costs are relatively low, although fees and taxes vary widely by state. Even though it is a good idea to seek assistance from a lawyer or accountant, the procedure is straightforward enough for owners to handle without requiring any special expertise. Annually is usually the deadline for ongoing requirements.
Disadvantages of an LLC Before registering your company as an LLC, take these potential disadvantages into consideration.
What is an llc and how does it work?
There are restrictions on limited liability. A judge may decide that your LLC structure does not protect your personal assets. The act is known as "piercing the corporate veil," and you could be in trouble if, for instance, you fail to clearly distinguish between personal and business transactions or if you run the company fraudulently in a way that caused losses for other people.
» MORE: Self-employment tax and business insurance for LLCs The IRS treats LLCs as partnerships for tax purposes unless members opt to be taxed as corporations.
The government considers members of your LLC who work for the business to be self-employed if your LLC is taxed as a partnership. This means that based on the company's total net earnings, those members are personally responsible for paying taxes to Social Security and Medicare, also known as self-employment tax.
If you and other LLC owners work for the company and file IRS forms to be taxed as an S corporation, you and the other owners pay Social Security and Medicare taxes only on your actual compensation, not on the entire company's pretax profits.