Nearly everyone knows someone who has formed an LLC at some point in their lives. Maybe it was your cousin who sold a bunch of fun t-shirts that one summer. Maybe it is your friend who started up her own wine painting party company. Whatever the reason, forming an LLC can be helpful for small business owners.
But, like most things, forming an LLC isn’t for everyone. We’re going to take a quick look at some of the pros and cons of forming an LLC.
First thing first, what exactly is an LLC?
A limited liability company, or an LLC, is the specific form of a private limited company. It’s business structure combines the tax advantages and flexibility of a partnership while also providing the liability protection of a corporation. An LLC can have one or many “members” also known as owners. There are more than two million LLCs in the United States, according to the IRS in 2014.
If you decide to form your business as an LLC, you do have some pros, which include:
Limited Liability: This may be one of the first pros that comes to mind. An LLC makes it so that the members, or owners, aren’t personally liable for the actions of the company. An owner’s personal assets are protected.
Tax Help: An LLC is a pass-through entity, unless otherwise stated, which allows the profits from the LLC to go directly to the members without being taxed by the government on the company level. Instead, the profits are taxed on the members’ federal income returns. This allows an LLC to simplify their taxes and also helps if your business loses money.
Ease of Use: Starting up an LLC is simple and can even be done online with minimal paperwork. Fees vary from state to state.
There are some cons when starting up an LLC that you’ll also want to be aware of before you go ahead and start one up.
Limitations: While LLCs do protect owners, they can still be found liable if they don’t clearly separate business and personal transactions.
Self-Employment Tax: The IRS looks at LLCs as partnerships when it comes to taxes. This means that the LLC members, or owners, need to personally pay for their Social Security and Medicare taxes. If you choose to form your LLC as an S Corporation, however, the owners and those who work for the company will pay Social Security and Medicare taxes only on their actual compensation from the LLC.
Multiple Member Issues: In some states, if a member leaves the LLC then it must be dissolved and a new LLC must be started up from scratch. Just something to keep in mind.
Of course, this is a very simplistic look at starting an LLC. If it is something that you’re interested in, we advise you do research and talk to professionals who have worked with LLCs on a regular basis.
While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.