Advantages and Disadvantages of Forming a Limited Liability Company (LLC)

Employment / Personal Injury / Business

When it comes to starting a business, there are a wide array of issues to consider. How will you scale your idea? How will you go about acquiring customers? How will you let potential customers know about you? Oftentimes, one of the last issues an entrepreneur considers is the legal structure. But if you want your business to survive long-term, it is something you need to think about sooner than later. Today, I will discuss one option for a business formation called the Limited Liability Company or “LLC.”

Advantages

The biggest advantage of the LLC lies in the liability protection its member(s) are afforded.  Members in an LLC enjoy the same protection from potential lawsuits as shareholders in a corporation without having to observe all the corporate formalities.  As a member of an LLC, property you own individually is protected.  No matter what happens in the company, nobody can come after your house, your car, or your individual bank account for the company’s negligence or its debts.

The Small Business Association has some great points regarding limited liability on their website at SBA.gov, including the following explanation:

[I]f the LLC incurs debt or is sued, members’ personal assets are usually exempt. This is similar to the liability protections afforded to shareholders of a corporation. Keep in mind that limited liability means “limited” liability – members are not necessarily shielded from wrongful acts, including those of their employees.

Another great benefit of the LLC form is the ease of formation and the lack of record keeping requirements and formalities like shareholder meetings corporations are required to observe.  You can obtain and download the forms to start an LLC or even complete them online at www.pabizonline.com. However, keep in mind that forming an LLC is merely the first step.  I recommend having an attorney draft the operating agreement.  Sure, you can probably download an operating agreement online also, but I don’t recommend using a form operating agreement to chart your company’s future any more than I’d recommend using an owner’s manual for a GMC to figure out how to operate a Toyota.

Disadvantages

For small businesses, there aren’t many.  The LLC is the entity of choice in most situations.  However, in Pennsylvania, it is not the entity of choice to hold and develop real estate that may appreciate significantly in value.  It is also limited in the number of members it may have so you cannot “take it public.”

Tax Considerations

As far as the IRS is concerned, the LLC is a “disregarded entity.”  This means that the IRS will treat a one-member LLC as a sole proprietorship and a multi-member LLC as a partnership.  Members will pay “self-employment tax” on their income.  However, members can elect to be taxed as an S-Corporation at the time of or within sixty days of formation.  Members can realize significant tax savings through this election, but it comes at a cost.  Members must put themselves on payroll as employees of the LLC and may only take profits from the LLC quarterly.  I recommend S-Corp taxation for LLCs that can count on a reliable revenue stream.

To decide whether an LLC is the right business form for your company, call our Yardley office at 215-493-8287 or send us an email HERE –We will be happy to get you started or discuss your options. 

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