Why start an LLC? Limited Liability Company Advantages and Disadvantages

Choosing the right business formation is freighted with long-reaching repercussions. The way you’ll pay taxes, the personal liability you’ll have, and the amount of rules and regulations are directly dependent on the way you legally form your business.


One of the most common choices is a Limited Liability Company, or what’s commonly known as an LLC. LLCs are different than the more traditional corporate structures (C-Corps and S-Corps), although they do share some characteristics.

LLCs tend to be flexible but also protect you from personal liability. They aren’t as structured as a corporation and take less paperwork.

But that’s just an overview. Let’s look at some advantages and disadvantages to help you choose if forming as an LLC is right for you and your business.

Advantages

Tax Flexibility: Generally, like a sole proprietorship or a partnership, an LLC isn’t considered a separate entity from its owners. This means that your LLC will not pay taxes by itself; rather, the owners do on their personal tax returns.

That said, owners can choose to have their LLCs taxed like a corporation. This is called “check-the-box” taxation and it allows you to elect the way you want to be taxed. No other business formation gives you this much flexibility.

Easy Set-Up: Starting a Limited Liability Corporation is generally faster than traditional incorporation.

Less Paperwork: In terms of paperwork (and especially when compared with C-Corps or S-Corps), LLCs are very flexible. Generally, you’ll want to have an LLC Operating Agreement so you can choose the specific rules that govern your unique business. Otherwise, your company will be governed by the default rules in your state.

With less stringent requirements for compliance and less necessary paperwork, LLCs are easier to form and easier to keep in good legal standing.

Limited Liability: Unlike sole proprietorships or partnerships, LLCs allow you to shield yourself from personal liability if your business goes bankrupt or injures someone or otherwise runs into legal trouble. This means that, although your business might fold, courts and creditors will generally not be able to take your personal assets. In other words, your business and personal responsibility and assets are separate.
 
Disadvantages

Tax Flexibility Can Backfire: Unless you choose to be taxed like a corporation, LLCs are usually subject to self-employment taxes. These can actually be higher. For this reason, if you do choose to start an LLC, it’s a great idea to speak to a knowledgeable lawyer or accountant who can explain this fully. Since laws and taxes vary state to state, what’s right for your company in Oklahoma might not be right in Massachusetts.

Laws Vary by State: Speaking of which, while the laws that govern corporations tend to be well-developed, the laws around LLCs vary much more significantly. Some states are kinder to LLCs than others. As such, if you’re thinking about doing business in multiple states, you will likely run into different laws and statutes that could become confusing and make it harder to recognize potential pitfalls.

Confusion About Roles: Whereas corporations have specific roles (like directors, managers, and employees), LLCs generally do not. This can make it difficult for the company and especially investors to know who’s in charge, who can sign certain contracts, etc. Some of this confusion can be avoided by creating an LLC Operating Agreement.

Conclusion

As we mentioned above, LLCs give you a great combination of flexibility and protection. In that way, you can think of an LLC as falling somewhere between a corporation and a partnership. While corporations have stringent rules surrounding their roles, taxes, and legal obligations, LLCs have less. And while partnerships are easy to start and have little in the way of rules, they give the owner no personal liability protection.

Of course, an LLC might not be right for your unique business. If you're having reservations, check our article of the tax considerations of each business type as well as our overview of each business structure.

Then, once you feel you’ve made the right decision for your business, visit our Incorporation Center and form your business today.

Laws on this topic may vary from state to state. This content is not meant to provide you with complete information and it is not intended to be legal or tax advice. It is recommended that you consult with your own attorney, accountant or other advisor regarding your specific situation.