The advantages of an LLC include legal protection and potential tax benefits for businesses of all sizes, whether a one-person shop or a small business with a team of employees.
Easy and economical training process
LLCs are generally simple and inexpensive to form compared to other business entities. Initial filing fees vary from state to state, but it usually costs no more than a few hundred dollars to form an LLC.
There is also a minimal amount of documentation that must be submitted at the time of formation, which typically includes a short form from the state business commission. Check your state government's website for the local application process and fees.
Personal assets are protected
Setting up an LLC helps you avoid being held canada whatsapp numbers personally liable for your company's failures. This means that if someone files a lawsuit against the company, the plaintiff cannot claim the owners' personal assets, such as houses, cars, or cash savings.
This limited liability protection extends to creditors, who cannot collect assets outside the company to recover losses (such as defaulted loans).
Avoiding double taxation
Unless an LLC elects to be taxed as a C corporation, it operates as a tax-passable entity. This means that profits avoid the 21% federal corporate tax rate. Instead of paying corporate profits tax and personal income tax, LLC members report profits and losses on their personal tax returns and pay accordingly.
Legal and fiscal flexibility
Unlike corporations and most other types of business entities, LLCs can choose how they want to be taxed.
Flexibility in distribution
LLCs offer flexibility in the distribution of profits and losses among members. This distribution does not have to conform to the ownership percentage; it can be customized according to the members' agreement.
Consider an LLC with three members, who own 50%, 30%, and 20%, respectively. They could agree that profits are distributed equally among them, despite their different ownership percentages. This flexibility can be used to reflect the members' actual contributions and responsibilities, leading to a more equitable arrangement.
Disadvantages of an LLC
LLCs involve more complex taxation and some upfront costs. Limited liability protection is also not guaranteed, but instead depends on the owners keeping their LLC separate from themselves. Here are some things to consider when choosing the best entity type for your business.
There are initial costs
There is usually a small filing fee associated with forming an LLC. Owners may also choose to hire a tax professional to handle the formation paperwork on their behalf, which adds costs to the process.
There are exceptions to personal liability protection
In most cases, LLC members' personal assets are considered separate from the business, and therefore are protected from any litigation involving the business. However, a judge may rule otherwise if LLC members fail to keep the business's finances and operations separate from their personal finances, or if the business has committed fraud.
Self-employment taxes may apply
Profits from LLCs taxed as sole proprietorships or partnerships are subject to self-employment taxes in addition to income taxes. Self-employment taxes cover Social Security and Medicare taxes for owners. Overall, the federal self-employment tax rate for 2023 is 15.3%.
An IRS Form K-1 is required to file taxes
Member-managed LLCs require an extra layer of paperwork for tax purposes. Each member of the LLC must file a Schedule K-1 (Form 1065). This document details the income, deductions, and credits of each member of the business, and members cannot file personal taxes without it.
Some states require that an LLC be reconstituted if a member leaves.
If your LLC has multiple members, you may need to dissolve it and reconstitute it as a new one if a member leaves the company. This is true whether a member retires from the project or dies.