Choosing a business structure is a major decision, one that can have a lasting impact on your commercial enterprise. Limited liability companies (LLCs) offer numerous benefits to certain businesses, provided that the structure meets your specific needs.
LLCs can also have some potential drawbacks, so it is important to weigh the decision carefully. Here are a few critical points to consider before making a decision.
Pros of LLCs
The biggest benefit of an LLC is the liability protection it offers members, which is not present in sole proprietorships and partnerships. In the event your business incurs debt it cannot pay or another party files suit against you, personal assets and property remain protected. Corporations also offer liability protection but are often more complex and expensive to set up.
LLCs also have another great feature that not all corporations have, which is protection from double taxation. Unless you are running an S corporation, you must pay tax on the corporate level and the shareholder level. With an LLC, pass-through taxation means that members pay taxes on their personal returns and not the business entity.
Cons of LLCs
While they do offer reliable protection from liability issues, owners are not completely impervious to potential problems. For example, if a court determines that you have mixed personal and business finances, your personal assets are vulnerable. The same issues can arise if the court believes fraudulent actions on your behalf led to losses by others.
Additionally, members must remit a self-employment tax to the IRS to cover things like Social Security and Medicare. These taxes amount to a percentage of the business’s total earnings.
The more you know about LLCs, the easier it is to make the right decision. You can also establish a sole proprietorship or partnership for the time being and update the structure when necessary.