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Key Advantages and Disadvantages of LLC Business Structure

An LLC may have one or perhaps many “partners,” the official term for all those owners. According to this article, clients may be individuals or other companies, and there’s simply no limit to the number of members that an LLC might have. LLC was initially offered as a company structure option 40 decades ago in Wyoming. Now, about 2.4 million U.S. companies recognize as LLCs, and their numbers are increasing faster than any other company kind, according to the IRS. Posted below are some of the LLC structure’s advantages and disadvantages to help you decide whether it is the proper structure for your business.

The Advantages

Choosing to incorporate your business as an LLC offers many advantages.

Limited Liability

Members are not personally liable for the provider’s actions. It usually means that members’ assets – homes, cars, bank accounts, investments – are protected from creditors seeking to collect from the company. This protection applies as long as you manage your business correctly and keep your finances separate from your business.

Pass-Through Profit Taxation

Unless successful, an LLC is a “pass-through” entity, meaning its profits go directly to its members without being taxed by the government at the corporate level. And if your company loses money, you and the other members can take the hit on your tax returns and reduce your tax liability.

Management Flexibility

An LLC can choose to be managed by its members, making it possible for many owners to have a say in the business’s day-to-day decisions or by managers who can be members or outsiders. It is useful when members don’t have experience running an organization and want to employ them.

Better Startup and Upkeep

The documentation and initial fees to acquire an LLC are relatively small, although there are wide variations in each state’s fees and taxes. For example, the filing fee for Arizona’s organization items is 50, while Illinois’ price is 500. Aside from these models, the process is relatively straightforward for owners to navigate without any unique expertise. However, it’s a great idea to talk to an attorney or professional for help. Ongoing requirements are usually annual.

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The Disadvantages

Before registering your business as an LLC, be aware of these potential pitfalls.

Limited Liability Limits

A judge will point out that your LLC agreement does not protect your assets in a lawsuit. The lawsuit is called “lifting the corporate veil,” and you’re likely to expose yourself to this risk. Typical examples are if you don’t clearly distinguish business transactions from personal ones or if you’ve already been shown to have fraudulently managed the organization in a way that contributed to the losses of others.

Self-Employment Tax

By default, the IRS considers LLCs the same as partnerships for tax purposes, unless members opt to be taxed as a corporation. If your LLC is taxed as a partnership, the government considers members who work for the business to be self-employed. Usually, these members are responsible for paying Social Security and Medicare taxes, collectively called self-employment taxes, based on the organization’s total income.

Consequence of Member Turnover

In many states, the LLC must dissolve if a member leaves, goes bankrupt, or resigns. The remaining members are responsible for any tax and legal obligations required to terminate the entity. Of course, these members can continue to do business; they create an entirely new LLC from scratch.

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