LLC Limited Liability Company
LLC Limited Liability Company Pro and Con Analysis include being easy to form, protecting owners from personal liability, and offering flexible tax options. However, LLCs also make raising money difficult and can misalign owner tax burdens and their earnings from the company.
Much has been made in the business world about the benefits of forming your business as an LLC Limited Liability Company. But before you make the decision, it’s important to understand the advantages and disadvantages of this type of business structure.
Combining some elements of a corporation tax and some elements of an LLP partnership/sole proprietorship, the LLC is not considered a corporation, but it does provide some of the same protection a corporation offers. Here are some more details on the advantages of an LLC:
- More flexibility: Although a limited liability company must file articles of organization with the state, it has a more flexible management structure than a corporation. The flexibility evolves from the phrase “unless otherwise provided for in the operating agreement.” This allows business owners to create a structure tailored to the business owner’s requirements.
- Limited liability: As its title suggests, the LLC protects owners and shareholders from personal liability in case of judgments or debts against the business.
- Tax options: An LLC can choose whether it wants to be taxed as a sole proprietorship, partnership, S corporation, or corporation.
- Fewer compliance issues: In most states, an LLC doesn’t need to have an annual meeting, and the LLC isn’t required to have a board of directors. Plus, there’s less paperwork and recordkeeping required compared to a corporation.
- Perpetual existence: Like a corporation, an LLC has a life of its own and can continue to exist after the owners sell their shares or die.
- Investors: Much like a limited partnership, members of an LLC can be investors only and have little or no say in the daily operational decisions of the business, as long as this is stated in the operating agreement.
There are also some disadvantages to an LLC:
- Pass-through taxes: Although LLCs do not deal with the “double taxation” faced by a corporation, they do incur “pass-through” taxation, meaning that profits and losses are reported on each owner’s or shareholder’s tax return, whether or not the shareholders receive dividends. Because of that, the LLC Limited Liability Company may be more suited to a one-person owner situation, as shareholders may not appreciate pass-through taxation.
- Raising money: Because of the lack of a strict corporate structure and pass-through taxation, investors may be hesitant about putting their money into an LLC.
- Additional taxes: Many states, such as California, New York, and Texas, to name a few, require LLCs to pay a franchise tax or “capital values tax.”
- Less structure: The lack of strict requirements for governing the business could mean problems down the road unless a detailed operating agreement is in place, which requires additional upfront costs such as attorney fees.
LLC Limited Liability Company Pro and Con Analysis
You have the flexibility of being taxed as a sole proprietor, partnership, S corporation, or C corporation
As an LLC member, you cannot pay yourself wages.
How does an LLC Limited Liability Company compare to an S Corporation What are the major advantages and disadvantages of an LLC?
S corporations have some advantages over LLCs. It can be easier to obtain outside funding as some investors and banks prefer to invest in corporations than LLCs. … LLC owners, in contrast, pay self-employment taxes, which can result in a higher overall tax liability.
How is an LLC Limited Liability Company taxed?
A Limited Liability Company (LLC) is not a separate tax entity like a corporation; instead, it is what the IRS calls a “pass-through entity,” like a partnership or sole proprietorship. … The LLC itself does not pay federal income taxes, but some states do charge the LLC itself a tax.
How do I pay myself from my LLC?
You pay yourself from your single-member LLC by making an owner’s draw. Single-member LLC is a “disregarded entity.” In this case, that means your company’s profits and your incomes are the same. At the end of the year, you report them with Schedule C of your tax return (IRS Form 1040)
Who pays more taxes LLC or S Corp?
S Corps have more advantageous self-employment taxes than LLC’s. S Corp owners can be considered employees and paid “a reasonable salary.” FICA taxes are taken out and paid on the amount of the salary.
How does a 2 member LLC file taxes?
An LLC with 2 or more owners is called a multi-member LLC, and the IRS taxes multi-member LLCs like a Partnership. … An LLC taxed as a partnership must also file a 1065 partnership return and issue K-1s to the LLC owners. An LLC can also elect to be taxed as an S-Corporation or a C-Corporation
Does a single-member LLC need to file a separate tax return?
Single-member LLCs do not file a separate business tax return. … LLCs protect the owner’s assets from being seized to pay for business debts. If an owner wishes to operate a single-member LLC, they need to file paperwork with the state in which they plan to conduct business
What is the best tax classification for an LLC?
Many LLC’s choose the S corporation for its tax status because:
It avoids the double taxation situation of corporations.
S corporation owners can take the QBI deduction on business income (not employment income)
Owners pay Social Security/Medicare tax only on employment income.
Are LLC double taxed?
The LLC Limited Liability Company is not a separate taxpayer, and it does not pay dividends. Thus, the double taxation concept does not apply to LLCs (unless, of course, an LLC elected to be treated as a corporation for federal income tax purposes, which would be a rare occurrence.)