Monday, February 6th, 2017

Choosing a Business Structure, Part 1: Pros and Cons of LLC

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This article is part of a three-part series outlining some of the basics about business structures. To see the next article, click on the link below the article.

When creating your own business, you will find out that there are a few options for creating your own company for tax purposes.  There are three basic options available to you, and determining which is best can seem complicated.

Here, we will look at the benefits and downside of creating an LLC, or a limited liability company.

Creating an LLC offers one major and immediate benefit over a sole proprietorship.  If your business is ever sued or you find yourself buried under major debt, your personal assets are not at risk.

An LLC creates a business that is a separate entity from you personally, protecting your home, vehicles, and other assets from liens and seizure in the event of a lawsuit.

Unlike C corporations, which can require substantial paperwork documenting corporate meetings, resolutions, and annual reports, LLCs typically have much less strenuous day-to-day paperwork to keep up with.

Like sole proprietorships and S corporations, an LLC is a so-called “pass-through” entity, meaning that it does not pay its own taxes, but rather the profits “pass through” to the owners and are taxed at the owner’s (or owners’) individual tax rates.

The downside of starting an LLC right off the bat is that it is more costly.  You will need to pay fees to file paperwork, and although they are typically less than $150, you may find that you need help filling them out.

With an LLC there is a good chance that you will need to solicit the services of a legal professional to ensure that all paperwork and forms are properly filled and filed.

With these things in mind, you can easily determine whether an LLC is the appropriate means of starting your business.  It is certainly best to look at all of your options.

When considering an LLC, keep in mind that a lawsuit is very rare, but understand that the ramifications are much less if you are able to keep your home and other assets separate from your business.  There is much to consider when forming your business, but this decision can always be changed later if you find that your choice is not the right one for you.

Continue to Part 2: Pros and Cons of Sole Proprietorships