Whether you are just starting your business or have been operating as a sole proprietorship or general partnership, you may be wondering about the benefits of incorporating your business as a limited liability company (LLC). Many business owners assume it will be too costly or time-consuming—but neither is the case.
The benefits of creating an LLC typically outweigh any perceived disadvantages and are typically unavailable to sole proprietorships and general partnerships.
- Protected assets. LLCs provide limited liability protection to their owners (members), who are typically not personally responsible for the business debts and liabilities of the LLC. Creditors cannot pursue the personal assets (house, savings accounts, etc.) of the owners to pay business debts. Conversely, in a sole proprietorship or general partnership, owners and the business are legally considered the same—leaving personal assets vulnerable.
- Pass-through taxation. LLCs typically do not pay taxes at the business level. Any business income or loss is "passed-through" to owners and reported on their personal income tax returns. Any tax due is paid at the individual level.
- Heightened credibility. Forming an LLC may help a new business establish credibility with potential customers, employees, vendors and partners because they see you have made a formal commitment to your business.
- Limited compliance requirements. LLCs face fewer state-imposed annual requirements and ongoing formalities than S corporations and C corporations.
- Flexible management structure. LLCs are free to establish any organizational structure agreed upon by the company owners. LLCs can be managed by the owners (members) or by managers, unlike corporations which have a board of directors who oversee the major business decisions of the company and officers who manage the day-to-day affairs.
- Few restrictions. There are few restrictions on who can be an LLC owner or how many owners an LLC may have (unlike S corporations).
Potential LLC disadvantages
LLCs may have some potential disadvantages, including:
- Formation and ongoing expenses. To form an LLC, Articles of Organization must be filed with the state and the applicable state filing fees paid. Many states impose ongoing fees, such as annual report and/or franchise tax fees. While these fees often are not very expensive for small businesses, LLC formation is more expensive than that of a sole proprietorship or general partnership, both of which are not required to file formation documents with the state. A few states, such as New York and Arizona, also require LLC owners to publish notice of the LLC formation in local newspapers for several weeks. This can be costly.
- Transferable ownership. Ownership in an LLC is often harder to transfer than with a corporation. With corporations, shares of stock can be sold to increase ownership. Typically with LLCs, all owners must approve adding new owners or altering the ownership percentages of existing owners.
- Less precedent. Because the LLC is a newer type of business structure, there is not as much case law or legal precedent for LLCs as there is for corporations.
For specific questions on which corporation structure is best for your business, consider talking with an attorney or accountant.