Limited Liability Company Facts Advantages and Disadvantages
Author : Gray Mike
It is important to remember that a business structure has direct impact on anything from mundane to pivotal business operations. Business owners have various options of selecting one of the following business structures:
* Sole Proprietorship
* Partnership
* S Corporation
* C corporation
* Limited Liability Company
Most entrepreneurs prefer to choose Limited Liability Company when setting up a company because it offer flexibility as well as tax and legal benefits. Limited Liability Company or LLC is a relatively new business structure that combines the limited liability feature of a corporation with the single taxation feature of a partnership or sole proprietorship. Although shareholders are the owners of the corporation, limited liability company is owned by members.
If there is no operation agreement created, the limited liability company is subject to the default rules of the state in which it is formed. For example, default state laws dictate that all members, individuals, corporations others LLCs or foreign entities have equal ownership interests. An operating agreement can override this otherwise unfavorable clause and indicate specific ownership interests in no uncertain terms.
Limited Liability Company comes with various advantages and disadvantages. Business owners must evaluate the pros and cons when setting up a company and settling on any types of business structure. This is the most effective way to determine whether or not LLC is the best type of business structure when setting up a company. The advantages of LLC include:
Taxation
Limited Liability Company can be taxed just like a corporation, a partnership or a sole proprietorship. This is an excellent benefit especially because LLC can avail pass-through taxation. That said, if the company is chosen to be taxed as a C corporation, it would be subject to double taxation. Note that an S corporation can avoid double taxation by skipping the intermediate step of paying dividends and passing the earnings directly to shareholders.
However, 16 states tax LLC better than S corporations. For business owners considering an S corporation status, note that in order to qualify, the shareholders cannot be more than 100. On the other hand, the number of LLC members has no upper limit.
Limited Personal Liability
Members of an LLC are not personally liable for business debts. This means that only the assets of the company can be used to settle business debts. That said, members can become liable for business debts for various reasons, including providing personal guarantees, signing contracts in their name or due to poor book keeping.
Continuity
The continuity of a limited liability company is guaranteed by creating an operating agreement in place since default state laws allow for the dissolution of an LLC even if only one member wants to quit the business. The operating agreement indicates the course of action that should be adopted if one or several LLC members become disabled, wants to sell their interest in the LLC or dies.
Administrative Requirements
LLC come with the benefits of limited liability of a corporation without having to satisfy administrative requirements like recording minutes of the meeting annual meetings, electing board of directors or officers, filing annual reports, etc.
While business owners get to enjoy several benefits that come with choosing LLC, it does have certain drawbacks as well. The following are LLC disadvantages:
Margin Tax
Most states impose a margin tax, also known as franchise tax, on LLCs since this business structure come with a limited liability status. The tax may be a flat fee or calculated based on the revenue generated by the company, profits earned by company or the amount of capital invested. However, there are also states that base the margin tax on the number of members the LLC has.
Capital Requirements
LLCs will find it hard to raise capital because most investors prefer companies that sell stocks, for funding. The capital requirements of the LLC can be met by selling ownership interest or by taking on debt. Creditors usually require members to provide personal guarantees for the repayment of the debt. In turn, this negates the advantages of limited personal liability.
Choosing the right business structure is important when setting up a company. It is best for business owners to know the advantages as well as the disadvantages of setting up a company as an LLC. In addition, it is also best to evaluate the advantages and disadvantages of LLC and compare it with the benefits and drawbacks of an s corporation, sole proprietorship, or a partnership to gain better understanding of the repercussions of establishing such types of business structure.
The author is a writer for setting up a company, an online-based information site created to provide relevant tips and articles focused on setting up a company.