An LLC or a Limited Liability Company is a business structure which provides its owner the protection from being held responsible for its debts and other liabilities.
This is the reason why an attractive number of individuals choose a limited liability company to start off their business. You just require a seller’s permit to get started. Let’s say you’re planning to establish an LLC in California, then you need a California seller’s permit to collect taxes on your taxable products and services.
Well, just like other business structures, an LLC also has both of the advantages and disadvantages. Let’s read them below.
- Pass-through Taxation: One of the biggest advantages of a Limited Liability company is that it offers pass-through taxation.
The Internal Revenue System (IRS) doesn’t follow a particular tax system for an LLC but follows both the features of a proprietorship and partnership.
If there’s a single owner in an LLC, then the government follows the tax treatment for a sole proprietorship and if there are more than one owner, then it follows the taxing style of a partnership.
In both the cases, the taxes pass through to the owner.
- Income Distribution Flexibility: Another advantage of an LLC is that it offers income distribution flexibility.
This business structure does not follow a rigid ratio of the partners’ capital contribution but has the flexibility to choose a ratio appropriate with their personal performances.
However, make sure that your chosen ratio complies with the IRS’s required guidelines on partnership income distribution.
- Simplicity: A limited liability company is easy to set up and is cost-effective than that of a corporation. Incorporating a corporation is a tedious task that requires a heavy leg work and investment.
However, establishing an LLC requires the submission of Articles of Organization and drafting an Operating Agreement with the state. An LLC does not require to perform formalities, such as holding annual board meetings, etc.
Now, along with the several benefits of an LLC, there are a few of the disadvantages too.
- Sometimes an LLC might end up paying more taxes than a corporation. In an LLC, both salaries and profits are subject to self-employment tax which is currently held at 15.3 %. However, in a corporation, only salaries are subject to the taxes.
- Forming an LLC is more expensive that a sole proprietorship and a partnership.
- Ownership is generally harder to transfer than in a corporation.
- Limited Life
Should I form an LLC?
Anybody who wants to limit their personal legal liability should think of forming an LLC. Establishing an LLC is comparatively easier and requires not much of the effort. Just file the Articles of Organization and Operating Agreement with the Secretary of the State and you’re good to go with your business operations.
And again, do not forget to get a seller’s permit first as it will be required in most of the places like before opening a bank account, etc.
Getting a seller’s permit is a hectic task, so you might consult document filing companies which do all the legwork for you while you just have to pay them a bit of your money.