An LLC is a legal entity that allows business owners to enjoy liability protections of a corporation, while maintaining the operational flexibility and tax advantages of entities such as a partnership. Essentially, an LLC is not recognized as a separate entity from its owner(s), which is different than a corporation, which is a recognized as something separate and apart from its owners. This distinction obviously creates a number of implications you want to consider.
Advantages & Disadvantages of forming an LLC:
1. Limited Liability: This is the biggest advantage for those who choose to file as an LLC. Owners’ personal assets get a great deal of protection from liability incurred by their company, which differs from entities such as partnerships. While it is true that owners of an LLC may still be personally liable in certain situations, it is much more difficult to get to the personal assets of an LLC’s owners.
2. Cost/Simplification: LLC’s generally will be less expensive than filing as a corporation, and will involve less paper-work and registration materials. Overall, the startup costs will be lower, which may be advantageous to your business in the early stages.
3. Less Restrictions on Sharing Profits: LLC’s will also allow profits to be shared with greater discretion by the owner(s). Corporations typically must adhere to certain statutory restrictions regarding their dividend and salary payments, however an LLC permits profits to be rationed in a more liberal way.
1. Limited Life: Typically what happens with LLC’s is that one of the founders will leave the company, and the remaining members are either unable to continue the business or they cannot agree on how to proceed. A corporation will usually have a longer life span and will outlive its founders after their departure. Also, some states will automatically dissolve an LLC if one of their members leaves. So you may want to put something in your original filing papers providing for solutions to situations like these that may arise in the future.
Employment Taxes: Because an LLC is a separate legal entity, it is not taxed separately, and the owner(s) will have to separately file their profits and losses. This creates a tax issue for owner(s) because they must pay a separate tax on their income as a self-employed individual.
How Easy is it to Make?
Regarding the formation of an LLC, states vary with what they require. So, you will need to do some research on what your State is looking for. Your best bet for this is to hire or consult a lawyer. A lawyer will be able to give you some helpful guidance as to whether an LLC is your best bet, and how you should go about forming it.
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