Considering an LLC? Here Are the Pros and Cons
A limited liability company (LLC) is a business made up of members, each of whom will ultimately have a limited liability for any debts that belong to the business, which essentially means their homes or savings accounts can’t be raided if the business goes under. The first LLC was established in Wyoming in the 1980s, but today, there are almost 2.5 million LLCs, with numbers growing faster than any other type of business based on statistics from the IRS.
As with anything, there are pros and cons to forming an LLC.
- There are tax advantages. Any profits earned by the LLC can be reported on each members’ individual tax returns, and business returns aren’t necessary. This prevents a situation where income is doubly taxed, when both the business and the owners pay taxes on the same earnings. LLC members can also deduct business loses as well as health insurance costs as part of their personal income tax returns.
- An LLC offers protections against liability. Because members of an LLC are not held liable for debts accumulated by the LLC, their personal assets – savings, homes, cars, IRAs, 401ks, etc. – are not at risk if the LLC goes bankrupt or is sued.
- An LLC can have as many members as desired, including just one.
- LLCs are easy to sell or transfer, so members can leave his or her shares to their heirs without much paperwork to make it legal.
- LLCs can be set up to maintain family assets, such as real estate. This allows assets to be passed directly to family members who are also members of the LLC without the need to pay inheritance taxes. Memberships can also be passed on to family members through a living trust.
- LLCs have versatility in that members can live in different states or different countries, and members can set up whatever type of management structure, distribution of profits, or voting rights that suit them best.
- Certain types of businesses are not eligible for LLCs. Check with an attorney to make sure if your business is eligible.
- Members can’t be paid wages, so if your business isn’t profitable, your income will suffer.
- Cases of fraud or other illegal acts will render protection of personal assets null and void, an act that is called “piercing of the corporate veil.” The easiest mistake to make it to mingle personal assets with business assets, or commit actions that result in losses for other members of the LLC.
- Members must pay self-employment tax, which can sneak up unexpectedly as it is not deducted from a paycheck, making it more difficult to track.
- If a member dies, the LLC in many states is required to dissolve, with the surviving members left with the business’s expenses – and the trouble of forming a new LLC.
An attorney can help you determine how to proceed
Are you interested in learning about forming an LLC? An experienced attorney can help you determine if the business type is right for you. For more information or to set up an appointment, contact Maxwell Dunn’s team at 248-246-1166.