Choosing the right entity for your business is one of the biggest decisions you will ever make as an entrepreneur. It affects your personal liability, the way you pay taxes, your operating procedure, and what regulations and restrictions apply to the way you do business.
Many entrepreneurs opt to form a Limited Liability Company, or LLC. LLCs are like corporations in that they protect their owners from liability, but they enjoy more operating and taxation flexibility and involve less paperwork. To help you determine whether an LLC is the right business structure for you, the advantages and disadvantages are highlighted below.
LLCs- The Advantages
Because the IRS does not regard an LLC as a separate entity when it comes to taxation, you and any other LLC members can decide how you want to be taxed. Options include:
- Single member LLC: This version is treated as a sole proprietorship for taxation purposes, with profits and losses being taxed through your personal tax return.
- Partner LLC: You and the other members can opt to be taxed as a traditional partnership.
- Corporation: You may choose to file using corporation standards.
It is important to be aware that the IRS automatically classifies some LLCs as corporations for tax purposes (e.g. insurance companies and joint stock associations).
LLCS protect their members from liability, meaning that you are not held personally liable for debts or court judgments that the company incurs. Your own assets are protected from the LLC's creditors, an advantage not available to sole proprietorships or regular partnerships.
Unlike C-Corps or S-Corps, LLCs do not have stringent compliance requirements or high volumes of paperwork in order to retain good legal standing. You can create an LLC Operating Agreement to create customized rules that govern the business. Otherwise, the company will be governed according to standard state rules.
Forming an LLC can enhance your credibility with customers: the ‘LLC' at the end of the company name can give an impression of being bigger and more established. Investors will also be encouraged by the fact that personal and business assets are kept separate.
When you operate an LLC, there is a legally binding business structure that can endure even after you retire or pass away. In some jurisdictions, an LLC can be adversely affected by a member's departure, but an Operating Agreement can combat this issue.
No Ownership Restrictions
S-Corporations is limited to 100 members, while an LLC can have an unlimited membership. LLC owners may also be trusts, other corporations, and even foreign nationals, while S-Corp ownership is limited to American citizens.
LLCs- The Disadvantages
Unless you opt to be taxed as a corporation, LLCs are required to pay self-employment taxes. When you and other LLC members include profits on your personal tax returns, the resulting taxes can be higher than their corporate counterparts. You will also be responsible for Medicare, Social Security, and other federal payments.
Taxable Fringe Benefits
LLC employees who receive benefits like medical insurance and group insurance must treat them as taxable income, while C-Corporation employees do not have to declare such benefits as taxable income.
LLCs deliver an appealing combination of liability protection and flexible taxation, but they might not be right for your business. An experienced business formation attorney can advise you on your recommended formation options after reviewing the size and scope of your enterprise. If an LLC turns out to be a good choice, the paperwork is relatively simple and the annual filing fees are not cost prohibitive.
If you'd like more information about forming an LLC in New York or New Jersey or starting a business, be sure to contact the Law Office of Philip P. Crowley LLC today. I would be pleased to meet you for a free consultation and help you get started in the right direction.