Pro’s and Con’s of LLC”s
A Limited Liability Company (LLC) is one of five basic US legal business structures. Limited liability means an owner or owners, also called members, are protected from personal liability for the company’s debts or liabilities. Other businesses can also be members.
Of the five structures, an LLC is one of the most popular. Each structure holds advantages and disadvantages, depending on the situation.
Attorney James M. Braden is a San Francisco business lawyer who can help you understand the optimal structure for your organization.
Here are some basic pros and cons of an LLC.
Advantages
Personal Assets Protected
One of the main reasons this set up is ideal is because creditors cannot collect or go after an owner’s personal assets.
Taxes: Pass-through and Deductions
Profits of an LLC “pass-through” to members, meaning members pay taxes on business profits on their personal federal tax returns.
This can have two benefits. Owners avoid double taxation and can lower their taxes by accounting for business losses on their personal tax returns.
Members also do not have to pay unemployment insurance on their own income.
Cash Instead of Accrual Method
Most LLC’s can use the simpler cash method of accounting. Income and revenue are not earned until payment is actually received. Therefore, income is not taxed until received.
Easier Start-up and Fewer Formalities
Little expertise is needed, and less paperwork and fewer fees are required. It is best to consult a San Francisco business attorney to ensure a seamless process.
Unlike a business set up as a corporation, LLC’s are not required to hold regular shareholder meetings and file annual reports.
Management and Ownership Flexibility
Members or non-members can manage the business.
Also, unlike an S-corporation, an LLC has no restrictions on the number of stockholders or their citizenship status.
In some locations, an LLC must be managed by members, unless filings with the proper agency state differently. A business lawyer San Francisco can familiarize you with state requirements.
Placing Shares in a Living Trust
Members can place their interests in a living trust and avoid the probate process.
Disadvantages
Limited Liability Voided
A court could set aside the limited liability, and hold owners responsible for company debts. This may happen when owner or investor assets are mixed with company assets or in cases of severe misconduct.
A business attorney in San Francisco can help you steer clear of potential risks.
Taxation of Profits
Profits are automatically included and taxed in a member’s income. This may make a C-corporation look more attractive as a business type, because they can delay profit distributions to shareholders. Therefore, shareholders do not always pay taxes on company profits.
Higher Taxes
Although an LLC is its own legal structure, for tax purposes it is treated as one of the other four legal business structures.
If it is taxed as a partnership, members are considered self-employed. They are responsible for paying Social Security and Medicare taxes on company profits.
If the LLC is set up with the IRS as a corporation, only salaries, not profits, are taxed.
San Francisco business attorneys can provide more information on tax pros and cons.
Taxed Fringe Benefits
Employees of an LLC must report fringe benefits as taxable income. A C-Corporation does not have the same requirements. Medical insurance or reimbursement plans, and group insurance are examples of fringe benefits.
Member Loss
If a member goes bankrupt or leaves the company for any reason, including death, the organization has to be dissolved. Owners can continue doing business, but they must start a new company. If this unfortunate situation should happen, San Francisco business lawyers are available to help with the process.
Attorney James M. Braden is available to help you get started or answer further questions.