For entrepreneurs who are starting new ventures, Limited Liability Companies or LLCs are among their most popular choices of business types. If you’ve ever looked up the names of companies who offer products and services you like, you might find that some of them have company names ending in “LLC”. Basically, an LLC is a type of company. It’s one of the options available to you if you’ve ever thought about starting your own business. But before you register your business this way, you need to learn more about LLCs to see if they’re the right type of company for you.
Let us start with a simple explanation of LLC. The acronym stands for “Limited Liability Company”. This means that the owners of the LLC, also known as “members”, are not personally liable for company debts and expenses. You might wonder, “But don’t other types of companies, such as corporations, offer that kind of protection as well?” The answer to that is yes, other types of businesses can give you limited liability, but the LLC has other advantages.
First of all, it’s relatively easy to form. Most states have downloadable forms that you can just mail in. In most states, the fees you pay are minimal (unless you opt for expedited processing). As for the long run, the records and paperwork required of LLCs are also usually simpler.
Another advantage of an LLC is that you can choose how you want to be taxed. You can opt to be taxed as a partnership, S corporation, or C corporation. This flexibility is attractive to many business owners, especially to those who want to take advantage of cheaper taxes.
Speaking of taxes, unless you’ve chosen to be taxed as a C corporation or you’ve established your LLC in the District of Columbia, you don’t have to worry about double taxation. You are taxed only once for the same income. This advantage makes the LLC an attractive choice to individuals who run a consulting or freelancing business.
Despite its benefits, an LLC also has its disadvantages. One major disadvantage is that you cannot sell stock or shares of the company. This makes it difficult to expand a business, especially for companies that plan to go public someday. Also, if one of the owners wants to leave the company, the LLC has to dissolve and be reformed again with the remaining members if they want to continue running the business together.
Also, the LLC is a relatively new entity. Because of this, it doesn’t have the prestige or trustworthiness attached to a corporation or other type of business. This makes it harder to seek funding if you’re looking for outside investors. This also means that state laws about LLCs also vary since there’s no singular consensus as to how the government should treat them fiscally and administratively.
As you can see, just like any other business structure LLCs have their own advantages and disadvantages. It’s up to you, the business owner, to determine whether the benefits of setting up an LLC is worth the disadvantages you’ll be facing.
