Limited liability companies or LLCs are extremely popular with small business owners.
In theory, a properly structured LLC is capable of delivering many of the benefits of a corporation without the hassle and headaches that are usually associated with an incorporated business entity. Although owners don't receive all of the advantages associated with C-corp, LLCs are extremely flexible business structures. They aren't as iron-clad as corporations, but they can give owners the sense of security they are looking for when they initiate the incorporation process.
Limited liability companies aren't all upside. There are also some disadvantages associated with the decision to pursue a limited liability company business structure. Before you make any commitments, do your research and carefully weigh both the pros and cons of LLCs.
- Liability protection. LLCs are designed to insulate business owners from liabilities related to business debts and lawsuits. The veil is thinner than it is for a corporation, but it's a big improvement over the liability exposure of a sole proprietorship.
- Fewer legal requirements. The owners of LLCs are members, not shareholders. Since LLCs aren't corporate entities, it's much easier to meet legal recordkeeping and administrative requirements.
- Flexible membership. Unlike other business structures, LLCs can have a single member or several hundred members, making them an extremely flexible option for small businesses.
- No double taxation. Corporations often complain that dividends are subject to double taxation (once at the corporate level, then again at the shareholder level). Unless the LLCs elects to be taxed as a C-corp, taxation occurs on a pass-through basis.
- Legal ambiguity. LLCs are a relatively recent development and the laws governing LLCs are not nearly as developed as the laws governing C-corporations and other types of businesses. Complicating the issue even further is the fact that the treatment of LLCs vary from state to state.
- No public option. LLCs cannot participate in a public stock offering. For a rapidly growing business, this could be a problem since it will restrict the amount of investment capital the company is able to attract.
- Earned income. The managing member's share of LLC profits is taxed as earned income, meaning that unlike corporate dividends, it is subject to self-employment tax.