As the name suggests, an LLC is a limited liability company, and those companies forming under the umbrella of this type of organization are afforded limited liability. This company design helps to keep the personal liability of a business owner separate from the business. It is a relatively new business concept in the United States that offers the benefits of a corporation while eliminating some of the complications. Existing business owners sometimes wish to change the way they conduct business and thus switch to forming an LLC for business.
Starting an LLC: Pros
Before starting an LLC or converting your existing business to an LLC, you must keep an eye on the benefits that you would be getting as well as the extra costs involved. The benefits are to be calculated on the basis of the present economic condition and not forecasts. It is advisable to consult either an attorney or a tax professional to calculate the taxes and look into the legalities of forming the LLC. It is also advisable to hire a certified public accountant for counseling on the financial benefits of forming an LLC.
Forming an LLC also assures that the business can avoid double taxation, as with a C corporation. In corporations, the individual members of the corporation are taxed on what they earned. As a result of this, members of the corporation can wind up paying double taxes (once at the corporate level, and then again on the individual level), while the LLC has to pay only once.
There is no restriction on the organizational structure of an LLC. Officially organizing under an LLC also helps a new business in establishing creditability with potential employees, customers, partners and vendors.
Through the corporate veil, LLC owners are also protected by the corporate veil against having their personal assets seized.
Starting an LLC: Cons
The primary con of forming an LLC is the expense involved in forming the organization. To form the LLC, the articles of organization must be filed under the state government rules and regulations along with the filing fees in accordance with state laws.
Sometimes LLCs have to pay annual report or franchise tax fees. Thus the cost of forming an LLC can be more than a partnership or sole proprietorship.
Another disadvantage of forming an LLC is that it is difficult to transfer ownership. Since an LLC is a somewhat new business category, there are fewer case laws or legal precedents than corporations. The record-keeping requirements after the formation of an LLC is also a bit more stringent compared to that of a corporation.
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