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What are potential benefits and drawbacks of LLCs?

As someone starting out on your business venture, one of the first things you want to do is decide what business formation works best for your purposes. There are plenty of different business formations out there, from S Corporations to LLCs.

But which one works best for your current goal? And do the benefits outweigh the potential drawbacks, of which every formation has its own share?

Taxation and liability

Fit Small Business examines the pros and cons of an LLC. The formation of an LLC is easy since it requires unilateral paperwork filing. This straightforward and simple process is tempting to many. However, you often have annual fees or fees related to maintenance that can come out to hundreds of dollars every year.

For taxation, you have access to simplified “pass-through taxation”. This can sometimes mean lower taxes, too. But this is not always the case. Pass-through taxation does not always mean you will end up with fewer taxes, and you can face misaligned tax burdens.

Legal liability keeps your personal assets out of the equation if anything ever goes wrong and you need to file for bankruptcy. Filing for a formal business structure like an LLC also adds credibility to your business.

Management options

You also have more flexible management, with unlimited members and any kind of owner. However, there is more inflexibility with member turnover in an LLC. Each time a member changes, you must meet rigid requirements in paperwork.

In the end, the final decision depends on what you value most and what risks you are willing to take. Once you decide that, you can choose a structure that suits your needs best.

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