Advantages & Disadvantages Of An LLC

Date: 03.20.2023

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What are the advantages of an LLC?

Now that you know about the different business structures you can choose from, it’s time to delve into the world of Limited Liability Corporations. LLCs are an extremely popular business structure for many people looking to start their own company. They aim to bring together all the benefits of both corporations and sole proprietorships. Here are some of the advantages of forming an LLC:

  • Limited Owner Liability– You and your personal assets are protected from damages on your property or by your business, unpaid debts, and vendor disputes. However, circumstances such as fraud, commingling your personal and business funds, and failing to meet LLC requirements are not protected.
  • Easy to Form– To create an LLC, choose a state, file complying paperwork, and obtain an EIN from the IRS. You can even form LLCs online or use business formation services to get your LLC started.
  • Can Have Unlimited Partners– LLCs allow you to start with either one member or multiple members, depending on your business needs. So, an LLC can be owned by one person, like many small real estate companies are owned. Or, an LLC can be owned by a corporation, such as how Google (a C corporation) owns YouTube (an LLC).
  • Tax Flexibility– LLC owners can choose how they want to be taxed, whether as a sole proprietor or as a corporation. The U.S. Government Accountability Office found that of the 26 million businesses in 2014, 95% of those chose the pass-through method of taxation (often used by LLCs, sole proprietorships, S corps, and partnerships), while the remaining 5% were taxed as C corporations.
  • Unrestricted Pay– Different members can be paid varying amounts regardless of their share of ownership. This offers better profit-sharing and allows members to receive tax write-offs for business expenses.


What are the disadvantages of an LLC?

Creating an LLC has many rewarding advantages that appeal to entrepreneurs. With limited liability, owners can have peace of mind knowing their personal assets are protected in case anything were to happen with their company. However, owning an LLC comes with a few drawbacks. Here are some things to keep in mind when forming an LLC:

  • Taxes– While it’s an advantage that you can choose how your LLC will be taxed, either as a sole proprietor, partnership, or corporation, the IRS doesn’t consider you an employee. This means Social Security and Medicare payments are not deducted from your paycheck. Because the IRS doesn’t tax your LLC as a business entity, you must pay a self-employment tax on all LLC profits allocated to you.
  • Fees– To start an LLC, you must pay a setup fee, as well as ongoing annual fees to keep your LLC current. Depending on your state, fees can range from $0 all the way up to $800 or more.
  • Difficult to Make Profits– LLCs can’t make revenue from shares, which is unattractive to many outside investors. This makes it difficult to make raise capital because one of the only ways to make sufficient funds is if an outside investor decides to buy in as a member.
  • Uncertain Lifetime– Unlike corporations, if a member leaves your LLC, whether by death, retirement, or pursuing their own interests, the state will require the LLC to dissolve unless the operating agreement states otherwise. This leaves the company’s members having to handle the debts, finish business requirements, and divide profits and losses before dissolving the LLC. When it’s dissolved, they can decide to create a new LLC with the same members and business, or completely abandon it.
  • Limited Benefits- Because LLCs have limited liability, there are fewer benefits like group health insurance because you are considered self-employed in the eyes of the IRS.

How do I start my own LLC?

Finally, time for the fun part! After reviewing the pros and cons of starting an LLC and deciding it’s the right option for you, it’s time to start your own. Whether you want to form an LLC online or use a business formation service, you should follow these steps to get your LLC up and running:

Step 1: Choose a name for your LLC

The first step to starting your LLC is finding a state you plan on operating in and choosing your business’ name. Typically, most owners choose to start their LLC in the state they’re operating from. However, if you plan to extend your business to multiple states, you’ll have to choose which one you want to form your LLC in. Begin your LLC ventures by choosing the name for your company. Each state may have different requirements, but the general rule is that your LLC can’t have the same name as another LLC registered in your state. You can go to the state agency in charge of business filings, such as your Secretary of State Department, to search LLC names operating in your state to ensure the one you want isn’t taken. Additionally, most states allow you to mail a form with a fee to reserve your anticipated LLC name for a set period of time if you plan on starting an LLC in the future. Lastly, your name can’t be misleading, can’t include words like “bank,” “insurance,” or “city,” and must have LLC or “limited liability company” at the end of your name.

Step 2: Choose a registered agent

Once you have your LLC’s name chosen, it’s time to register your LLC. As you go through the process of registering your LLC, there’s going to be a lot of paperwork, and some states may require more documents than others. This leaves a majority of the states to require a registered agent, or statutory agent, to be appointed to receive all of the legal documents on your LLC’s behalf. The registered agent must be in the state of operation and available during normal business hours to collect legal documents. In most cases, the owner or employee is the registered agent. However, some may choose to hire a registered agent to take care of these matters so they can focus on their business.

Step 3: Hire an attorney

This step is optional, but hiring an attorney will give you peace of mind that all your legal work is filed correctly. From small business taxes to complying with health, safety, zoning, and other codes, a lawyer will help you along the way. An attorney will also look over your operating agreement (discussed in the step below), and will ensure you and other members are legally complying with the agreed-upon rules.

Step 4: Create an LLC Operating Agreement

An LLC Operating Agreement is a legal document required by most states when starting an LLC. An LLC Operating Agreement defines the ownership and membership duties of your LLC, while also detailing the roles and responsibilities of each member and manager. The U.S. Small Business Administration recommends creating an LLC Operating Agreement to detail the financial and functional decisions of your company. This agreement will outline how and when meetings will take place, how to transfer ownership if a member leaves, and how business decisions will be made. It will also include key pieces of small business accounting, such as how profits and losses will be distributed to each member.

Step 5: Publicly announce your business

This is an outdated practice, where decades ago the only way people knew about a new business being formed was through their local newspaper. However, some states such as New York and Arizona require you to publicly announce your business in a local newspaper. Often, the county clerk will determine which newspapers to publish in and can sometimes require you to publish up to six weeks in a row. Because a few states still require this process, check with your state’s LLC office or Secretary of State Department to determine whether you need to publicly announce or not.

Step 6: Obtain the right licenses and permits

Before you open up shop, there are still a few more legal matters that need to be taken care of. Depending on your industry, services, or products, you’ll need to obtain and file pertinent licenses, registrations, and permits in order to operate. Common licenses include a business license, law license, doctor license, food and safety license, zoning permit, or a seller’s permit. You’ll also need to obtain an Employer Identification Number from the IRS in order to legally operate with employees. It’s also required by the IRS to set up a bank account to keep your personal and business cash flows separate. Doing so will allow you to manage your small business payroll, accrue interest in a savings account, and manage your expenses.

How do I maintain my LLC?

Hooray! Now you know how to form a company. You’re all done filling out the forms, getting the right permits, drafting an agreement, hiring employees, and everything in between. The last thing you want is for all your hard work to go to waste. After you cut the red ribbon to open your new business, it’s just as important to maintain it and keep your LLC in good standing. To properly maintain your LLC, make sure you:

  • Keep detailed financial records
  • Record minutes of business meetings and major decisions
  • Determine your estimated tax payments
  • Pay your taxes on time every year
  • Keep your registered agent information up to date

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