In recent years, many states have begun adding the Limited Liability Company to their menu of available business formation types, and for several reasons, it has become very popular. Business owners like the limited liability afforded by the LLC form, as well as the ease of setup and maintenance. However, for those considering setting up an LLC, there may be questions that remain regarding its benefits, and any possible drawbacks to this business form. This article will break down both the pros and cons of the LLC, to enable you to make an informed decision on whether or not this form is the best choice for your business.
Just What is an LLC?
“LLC” stands for Limited Liability Company. The LLC is a business structure that is, in many ways, a hybrid of several other business formations, such as corporations and partnerships. LLCs offer limited liability, similar to a corporation. They also offer pass-through taxation, which is more similar to a partnership, or an S-corporation. For some businesses, the LLC form provides the perfect balance between liability protection and ease of maintenance.
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What Are the Pros of the LLC Business Form?
There are several strong benefits that come from the LLC business form. First, as noted, the LLC offers limited liability to its owners. This means that, in most cases, the liability for owners of an LLC will be limited to the assets of the comopany. If an owner of an LLC is sued by a customer, client, or other party, the limited liability feature of the LLC will protect his or her personal assets from being exposed or potentially lost. The powerful incentive of this restricted liability is what draws many business owners to the LLC formation type. It should be noted, however, that the LLC does not protect against all potential claims. For instance, the LLC formation may not protect owners from product liability claims and other such lawsuits.
Another benefit of the LLC is its flexibility. Owners can choose, for tax purposes, to be treated as a sole proprietorship, partnership, or corporation. Along with this, LLCs can be taxed on a “pass-through” basis, which means that profits earned by the LLC pass through the company, straight to the owner’s personal income, without being taxed at the company level. This is a major advantage over the corporate form, which is “double-taxed,” once at the corporate level, and then again at the personal level. LLC owners take any profits directly, and are then responsible for paying taxes on their individual tax returns. This avoidance of double-taxation can go a long way to preserving profits and simplifying the tax reporting process for LLC owners.
A third benefit of the LLC formation is ease of setup and maintenance. Some business formations, such as corporations, require significant paperwork and oversight to set up and maintain on an ongoing basis. There are also significant costs associated with such business types. The LLC, however, is much simpler in its requirements. In most states, all that is required to set up an LLC is a simple form or two, which asks for basic information such as business name, industry, owner name(s), etc. Also attractive is the cost of forming an LLC. The fee to file LLC Articles of Organization in Indiana, as of 2016, is less than $100. Ongoing regulatory costs are also minimal.
What Are the Cons of the LLC Business Form?
Although the LLC formation type does come with many advantages, there are also some aspects to this structure that may make it unsuitable for some business owners. First, as a member of an LLC, you are not permitted to pay yourself wages. While this may not be a problem for many business owners, it can present a challenge to someone who is looking for a way to simulate the consistent paychecks of a regular job.
A second disadvantage of the LLC type is that often, LLCs are not viewed as favorably as corporations by potential investors, due to factors such as an LLC’s inability to issue stock. There is still a level of familiarity and ease with which many investors view corporations, as opposed to LLCs, and therefore, raising capital for your LLC may be more challenging. Also, many creditors may refrain from granting credit to an LLC (particularly a new one) without a personal guarantee from the owner.
Finally, although the formation and maintenance requirements of an LLC are far less stringent than those of a corporation, there is still some work that needs to be done to keep an LLC in good standing. Simpler entities, such as sole proprietorships, are formed automatically and with little or no costs, but LLC formation requires drafting and filing Articles of Organization, paying an application fee, and obtaining approval from the Secretary of State. Additionally, in Indiana, an LLC will be required to file a biennial Business Entity Report, along with a filing fee for each report submitted.
Conclusion
A Limited Liability Company offers current and potential business owners a low-cost business structure that is easy to set up, simple to maintain, and beneficial in a number of ways. Business owners thinking about setting up an LLC should weigh all of the pros and cons carefully, and consider consulting an attorney if necessary.
NOTE
This article primarily references Indiana law. Please check the laws of your local jurisdiction if you live in another state.
The articles in this blog are for informational purposes only. No attorney-client relationship is established through the publication of these articles.
