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What should you know about starting a business as an LLC?

On Behalf of | May 13, 2024 | Business Law

When a person starts a business, one of the first decisions they have to make is what type of business structure to use. There are several options, including a limited liability company (LLC) structure.

There are benefits and drawbacks of this type of business structure. Understanding them may help you to decide if this is the best option for your new company.

Benefits of establishing a business as an LLC

One of the most significant benefits of establishing a business as a limited liability company is the legal protection it offers. Owners of an LLC, known as members, typically have their personal assets protected from the company’s debts and liabilities. This means that in the event of business failure or legal troubles, members’ personal assets, like homes and savings, are usually safe from creditors.

Another advantage is the flexibility in taxation. LLCs benefit from pass-through taxation, where the company’s income is only taxed once, on the members’ personal tax returns, avoiding the double taxation commonly associated with corporations. Members can also decide how they want to be taxed, choosing to be treated as a sole proprietorship, partnership, or corporation.

Drawbacks of an LLC structure

Forming an LLC also comes with certain drawbacks. One of the primary considerations is the cost and complexity of formation and maintenance. Establishing an LLC involves filing fees and potentially higher ongoing costs such as annual report fees or franchise taxes. Additionally, the process can be more complex compared to sole proprietorships or partnerships, requiring more paperwork and formalities.

Another potential downside is that some businesses, particularly in the financial sector, may find that an LLC doesn’t meet their needs as well as other business structures like corporations, which can offer perks such as issuing stock. For startups aiming to seek venture capital, this can be a significant limitation, as investors may prefer corporations over LLCs for various reasons including familiarity with the structure and potential for stock options.

Evaluating an LLC for your business needs

Ultimately, the decision to form an LLC should be based on a careful assessment of a business’s specific needs, goals, and circumstances. The benefits of liability protection and tax flexibility need to be weighed against the potential drawbacks of costs and administrative complexities. Having a legal representative review the possible options with you and explain how each can affect you may help you decide how to proceed.