Over 600,000 new businesses open every year. If you’re just starting, one of the first steps is to register your business as a particular business structure. One attractive option is to register as a limited liability company (LLC).
Are you considering registering as an LLC but aren’t quite sure it’s the right move for you? We’re here to help. Here are the top four pros and cons of LLCs.
Pros of an LLC
Let’s take a look at some of the pros and cons of LLCs. First, we’ll cover the pros of an LLC.
1. Limited Liability
This one should be pretty obvious since it’s right in the name. But what does “limited liability” mean? It means it limits potential liability to you as a business owner.
An LLC prevents a potential plaintiff from suing you for personal assets. This includes damages caused by your product or that occur on your property. It also includes business debts or disputes with vendors.
2. Changeable Tax Structure
Owners of an LLC can choose how they are taxed. Most of the time, businesses will choose a pass-through method (95% of businesses in America use this method). But you can also select a C-Corp or S-Corp option.
3. Easy to Create
It’s quite simple to create an LLC. You can file online in minutes. Then, you’ll get an Employer Identification Number from the IRS so that you can set up a business checking account.
4. More Flexible
An LLC has a lot of flexibility in its management structure. It also isn’t restricted to a specific method for paying members or partners. Likewise, you aren’t limited to a certain number of members or partners.
Cons of an LLC
LLCs aren’t perfect. Next, let’s cover some of the downsides of forming an LLC.
1. Complicated Taxes
With an LLC, preparing taxes is a bit more complicated. First of all, you have to prepare your filing each year. If you choose the pass-through method, you need to prepare a K-1 for every single member of your LLC that’s then filed as a part of his or her personal tax return.
Finally, some states tax you even further. These are usually called excise or franchise taxes.
2. Filing Fees
You’ll need to pay a fee to file a new LLC to your state. This fee can range anywhere from $50 to $500.
Additionally, most states have annual filing fees. These can cost up to $800 per year.
3. Raising Money is More Difficult
Raising money for an LLC can be more complicated than other types of businesses. Because of pass-through, it makes it riskier for investors to put money into your business.
Additionally, you can’t issue shares for an LLC. The only way to invest is to buy-in as a member. So if you need to raise a lot of capital for your business, it’s best to choose a different structure.
4. Less Structure
LLCs are flexible, but this means that there are fewer requirements for the company. This could potentially open you up to legal troubles in the long run if you don’t set up a detailed operating agreement right away.
Pros and Cons of LLCs: Now You Know!
Now you know the significant pros and cons of LLCs. So what are you waiting for? Register your business today: it only takes a few minutes!
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