When starting your business, I always say that the ONLY FOCUS should be on working on your project, getting it off the ground and getting the work delivered to your clients.
Only AFTER you have a solid business model, with a consistent income flow, and a growing client base should you start working on setting up a business entity-like an LLC.
Why?
1. Because there are costs involved in the administrative registration, handling, and tax filing processes of an LLC
2. Because you want to make sure that you don’t waste time and money setting up an LLC when you’re still at at point in your business where you don’t need the liability protection that the LLC provides.
However, these reasons are minor when comparing the benefits that registering an LLC may offer to your specific circumstances, business goals, tax strategy, and personal assets.
So, in order to provide you some clarity, I'm sharing with you the Pros and Cons that you can use as a guide to know whether an LLC is the right business entity for you.
What is an LLC?
A Limited liability company (LLC) is a business structure that offers limited liability protection and pass-through taxation. As with corporations, the LLC legally exists as a separate entity from its owners. Therefore, owners cannot typically be held personally responsible for the business debts and liabilities.
The LLC allows for pass-through taxation, as its income is not taxed at the entity level; however, a tax return for the LLC must be completed if the LLC has more than one owner. Any LLC income or loss as shown on this return is passed through to the owner(s). The owners, also called members, must then report the income or loss on their personal tax returns and pay any necessary tax.
Benefits of Forming an LLC
The benefits of creating an LLC—as opposed to operating as a sole proprietorship, or forming a corporation, include:
Limited liability:
The owners of an LLC are immune from personal liability for the actions of the LLC and its other members. An LLC shields owners from personal liability for any wrongdoing committed by co-owners or employees of an LLC while conducting business because the LLC is a separate legal entity from its owners, and therefore is liable on its own for the legal actions claimed against it. Owners (members) of an LLC protect their personal assets this way because Creditors of an LLC cannot seize the owners' personal assets, home, savings accounts, etc., to satisfy business debts. You should always stay vigilant though because LLCs (as well as corporations) can lose its limited liability. This is referred to as "piercing the veil."
Flexible membership:
Individuals, partnerships, trusts, or corporations may form an LLC, and there is no limit to the number of members. When compared to S corporations (which are LLCs that have elected to be taxed as a pass-through entity under Subchapter S of the Internal Revenue Code), LLCs are more flexible because S corporations are much more restricted in who can be a shareholder, and there is a maximum limit on the number of shareholders.
Management:
Members can manage the LLC themselves or elect a management group. Corporations, on the other hand, are run by a board of directors rather than shareholders.
Pass-through taxation:
LLCs do not typically pay taxes at the business entity level. Any business profit or loss is "passed-through" to the owners and reported on their personal tax returns. Any taxes owed are paid on an individual basis. Corporations, on the other hand, that cannot or do not wish to be taxed as S corporations (known as C corporations because they are taxed under Subchapter C of the Internal Revenue Code) are taxed at the business entity level, and their shareholders are taxed on the income distributed to them.
Heightened credibility:
Starting an LLC can help a new business establish credibility faster than operating as a sole proprietorship.
Limited compliance requirements:
LLCs have fewer compliance requirements and ongoing formalities than sole proprietorships, general partnerships, or corporations (whether taxed as S corporations or C corporations).
Disadvantages of Creating an LLC
There are a few disadvantages to creating an LLC too, although in many cases the advantages outweigh the drawbacks, depending on your circumstances and goals.
Cost:
An LLC typically costs more to form and maintain than a sole proprietorship or general partnership. States charge an initial formation fee. Many states also charge ongoing fees, such as annual report and/or franchise tax fees.
Transferable ownership:
Ownership in an LLC is frequently more difficult to transfer than ownership in a corporation. Corporations can sell shares of stock to increase ownership, and shareholders can sell their shares to someone else unless there is a shareholder agreement to the contrary. With an LLC, unless the members agree otherwise, all members must approve adding new members or changing the ownership percentages of existing members in an LLC.
With your tax and business planning, the strategies are not a once size fits all, on the very contrary, each case varies greatly and specific personal, business, and financial circumstances must be taken in consideration before implementing the strategies that will produce the results sought. To get a specific strategy that will work for you and your business, make sure to schedule a consultation and let's find out what is the most beneficial entity for you and your business.
