When your business has grown, you will need to choose a certain business type that will be most beneficial for you. You can build a limited liability company (LLC) or be a corporation. At this time, you should spend a lot of time in contemplation. But remember that time is crucial. Choosing one between the two as soon as possible will let you experience the benefits of either of the choices earlier.
For now, let’s explore the advantages and disadvantages of forming an LLC.
Why Choose to form an LLC?
- When you want to separate personal and company finances
True to its name, when you choose to form an LLC, the company will only have to shoulder little liabilities. The members of the business will deal with the debts. In the same way, the members’ investments in the company will not affect their other assets. This is one way for everyone to safeguard their personal assets.
- When you need to save on taxes
An LLC is considered a “pass-through entity” because it does not pay its own taxes. Both the income or loss goes directly from and to the owners, who need to pay income tax. This feature may be beneficial because you can deduct losses from your other income.
- When you want a more trustworthy name
An added benefit of being an LLC is the right to add “LLC” or “Limited Liabilities Corporation” to the name of your business. This will make your business appear to be more trustworthy or professional. Adding a corporate suffix implies that your business exists in the records of the state and is an actual legal entity.
- When you need to bypass state restrictions
Countries usually impose restrictions on the ownership of a corporation. It usually depends on the residency or citizenship status of the owners. The LLC imposes no such restrictions on businesses. Other corporate entities such as other corporations or even other LLCs may also be LLC members.
- When they want more control on their business
Running a business is tedious. You need to process compliance requirements, which may add to the stress. Corporations need to undergo at least an annual meeting with their directors and shareholders. They need to adopt bylaws and keep records of meetings and other corporate resolutions. An LLC, on the other hand, is not subject to the same requirements. They only have to submit state-mandated annual filing requirements and ongoing formalities. The LLC members may conduct meetings however they want to and document those meetings only if they want to.
Disadvantages of Forming an LLC
The Pass-Through Taxation functionality of the LLC can sometimes prove to be a liability because the taxes can be considered as personal income of LLC members. Thus, the taxes may oftentimes be higher than those at a corporation.
Requiring a business checking account may also prove to be significant. With it, one will be able to separate business from personal assets. However, these banks require different fees or monthly expenses for maintenance.
So when should you consider being an LLC over a corporation? It’s when you want to separate your personal finances and your business finances, when you do not want to organize a separate tax return for a corporation and for yourself, and when you want to have that professional sounding business name but with less required paperwork involved. If these describe your current situation, then turning your business into an LLC should be an obvious choice.