A limited liability company is a common business structure here in the US. Just like other business structures, LLCs have both their pros and cons.
The major pros of LLCs include;
- Limited Liability
Members of LLCs have liability protection, which implies that members are not liable for the actions of the company. For example, if a limited liability company suddenly goes bankrupt, or is being sued and plunged deep into debts, the personal assets of the members including their cars, homes, pieces of jewelry and other investments cannot be sold to compensate for the company. That said, members need to keep the business running and also keep business and personal finances separate to enjoy limited liability.
- Tax advantages
Another major advantage of limited liability company is the fact that they are pass-through entities. This simply means that the owners of limited liability companies get to enjoy their profits directly, without the government taxing them on the company level. The truth is owners of limited liability companies rather pay taxes on their own federal income tax returns. Still, in terms of taxes, LLCs have an advantage in the fact that if the business loses money, its owners can shoulder the hit on their tax returns, thereby reducing their tax burdens.
- Easy management
Management is more flexible within LLCs. Members can choose to either participate in day-to-day decision making or to hire external professionals to manage the business for them.
- Easy startup
Above all, establishing an LLC is relatively easier than other business structures. The initial paperwork and the cost to set up an LLC are relatively lighter even though the rules vary from state to state. Indeed, the process is so simple that members can conveniently handle it without requiring any expertise.
Meanwhile, limited liability companies also have their cons:
- Limited liability sometimes has its limits.
A judge can pass a ruling that a limited liability company will not protect your personal assets in an action known as “piercing the corporate veil”. If this happens, members will be at risk especially if they had failed to separate personal transactions from business transactions.
- Business can easily come to an end.
Another major con of limited liability company is that the death of a member may mean dissolving the entire business. With LLCs, the business has to be dissolved if a member goes bankrupt, dies or decides to opt-out of the business. It is however worthy to note that these members can still do business but they will have to start a new LLC from the scratch.
- Self-employment tax disadvantages
The government considers members who work for limited liability companies to be self-employed in situations where the LLC is taxed as a partnership. This, therefore, implies that such members are personally responsible for paying self-employment taxes including Social Security and Medicare taxes.