One of the challenges that most entrepreneurs face is choosing the most suitable business entity. The entity that one chooses has its repercussions. It determines how taxes are paid, the regulations that come along with it as well as personal liability. A limited liability company is one of these entities. Before making a decision, it is important for one to understand what is entailed in the entity.
The Definition and Categories of LLC
An LLC is a hybrid kind of a legal structure that has limited liability features and also provides operational flexibility and tax effectiveness of a partnership. Its structure majorly depends on the state that one is in. However, broadly, it is possible to choose one of the three types of LLC’s:
- Professional LLC– It is organized with the aim of providing professional services. In most states, the individuals involved are required to have their respective licenses, such as architects, doctors or lawyers. The members are usually individuals within a similar profession. They must operate within the profession’s code of practice.
- L3C– This is an enterprise that should not be aimed at maximizing income, but rather for performing socially beneficial activities. It combines the benefits of nonprofit organizations, the market position of a social enterprise and the legal flexibility of a traditional LLC.
- Series LLC– It allows a single LLC to separate its assets into separate series. This is advantageous in that in case the lender forecloses on one series, the others are not affected.
Advantages of LLC
Fewer Compliance Requirements– whereas corporations are required to have annual reports, regular meetings with shareholders and the board of directors as well as have written corporate minutes, LLCs do not have to hold frequent meeting. This largely reduces the paperwork that ought to be done.
- Tax Flexibility– The members do not experience double taxation. The IRS does not regard an LLC as a separate entity. Thus, it is not taxed directly. Instead, the members decide on how they will be taxed. The can choose to be partners, single members, or as corporations.
- Limitless Members– There are no restrictions on the number of members required. Thus, the LLC can have many or as few members as desired. However, the IRS recognizes LLCs, which have at least two members.
- Protected Assets– They provide limited liability to the members. Therefore, the members are not regarded to be personally responsible for the business debts. This means that their creditors cannot pursue their personal assets.
Disadvantages of LLC
- Transferring Ownership– It is quite difficult to transfer ownership. The owners must first approve the addition of new members or altering of the existing member percentage.
- Additional Taxes– In some states such as New York and California, these companies are required to pay capital values tax or franchise tax.
- Raising Capital– It is harder to raise money due to two reasons. One of them is that some people find it difficult to put their money in the company because of lack of a strict corporate structure. The other reason is that it cannot be easily converted into a tradable stock company.
- Less Precedent– This form of business is a new concept. Therefore, there is not much law precedent for the limited liability companies, unlike corporations.