Insight

Language:

The pros and cons of establishing an LLC for your business

By Arjun Mahadevan

Published on 12 Sep 2022 2 min read

Making decisions for your business includes considering what business structure is best for your product or service. You decide whether you will stay as a sole proprietorship or venture into a partnership, LLC, or even a corporation.

This article discusses what your business can do as an LLC and the known advantages and disadvantages of the said business structure.

Defining an LLC

An LLC is a type of business entity that falls somewhere between a corporation and a sole proprietorship, though it can be either depending on the jurisdiction in which it is formed. The formation of an LLC protects the liability limited’s assets while also allowing its profits to be taxed like a sole proprietorship business entity. For this reason, LLCs are taxed similarly to sole proprietorships in that the owners report all business profits and losses on their personal tax returns. 

You don’t have to pay income taxes if you form an LLC. It uses pass-through taxation, which means that profits from the business are reported as income on the owners’ tax returns, avoiding double-dipping. The company then owes taxes on the benefits, and the owners owe taxes on their share of the money as well.

When it comes to financial responsibilities, LLCs gain liability protection similar to that of a corporation. Owners and managers of an LLC are usually not personally liable for the company’s financial situation.

Pros of forming an LLC

Starting a limited liability company (LLC) can help a new business establish credibility faster than operating as a sole proprietorship or partnership.

Whatever action the LLC or other members do will not affect the rest of the members; they’re protected from personal liability. Creditors can’t go after the owners’ personal assets to pay off business debts. The personal assets of sole proprietors and general partners, on the other hand, can be used to pay off the business’s debts.

Individuals, partnerships, trusts, and corporations can all join, and the number of members is unlimited. Compared to sole proprietorships, general partnerships, and corporations, LLCs have fewer state-imposed compliance requirements and ongoing formalities.

Members can manage the LLC themselves or elect a management group. On the other hand, corporations have a board of directors rather than shareholders. 

When an LLC is managed by its members, the owners are in charge of the day-to-day operations. When managed by appointed managers, the LLC resembles a corporation in which the directors and officers, rather than the owners, are in charge of business management.

Cons of an LLC

There are many reasons to form an LLC, but there are several factors to consider when deciding whether an LLC is the best structure for your business. When deciding how to organize your company in the competitive business world, it’s always a good idea to think about all of the factors.

One major disadvantage with an LLC is the life of your startup is the first thing you should consider. See, while corporations can exist indefinitely, an LLC is dissolved when one of its members dies or files for bankruptcy.

Conclusion

When incorporating their business in the United States, a wide range of companies appreciate the flexible structure and taxation options. This is why LLC is an ideal choice for small businesses. You can enjoy many benefits and have the opportunity to grow your business without worrying too much about its impact on your personal finances.

If you need assistance with opening an LLC in the U.S., you can trust Doola to know all the ropes. We help global entrepreneurs confidently form their companies in the U.S. and assist our customers in incorporating, accessing U.S. payment systems, and staying legal year after year. Book an appointment today to see how we can make your business happen in the U.S.