LLC Advantages and Disadvantages
Although an LLC can have many benefits that work for different types of companies, there are also some disadvantages. Following are the most popular LLCs. There are advantages and disadvantages to each.
LIMITED LIABILITY PROTECTION
Only the LLC can be held responsible for any debts or liabilities that the company incurs. Not the members. Members are only liable for the personal investment they make in the company. Forming an LLC protects the personal assets of each member, which is separate from the LLC.
PASS-THROUGH TAXATION
The LLC does not usually pay taxes. Usually, the net income/loss of an LLC is instead “passed through” and taxed as personal income. Federally, LLC taxation generally works the same way as a partnership, sole proprietorship, or corporation, except for a single-member LLC.
NO OWNERSHIP RESTRICTIONS
Foreign nationals can own an LLC if they wish. The LLC doesn’t have any citizenship or residency restrictions. Other corporate entities can also be LLC members, which means other corporations or LLCs may be members of the LLC or be the sole member.
VERSATILE STATUS OF TAX
The best thing about an LLC is its ability to decide how to treat it as a tax-exempt entity. An LLC is federally taxed by default as either a partnership in the case of multi-member LLCs or sole proprietor for single-member LLCs. However, members may choose to tax the LLC as a C or S-corporation at their discretion.
FLEXIBLE PROFIT DISTRIBUTION
The members may choose to have net income/profits from the LLC distributed in proportions corresponding to their ownership percentages in the LLC. The profit distribution is different than a corporation because corporations must distribute profits per each shareholder’s ownership percentage.
MINIMAL COMPLIANCE REQUIREMENTS
LLCs are subject to specific state-mandated annual filing requirements and ongoing formalities. An LLC is exempt from the requirements of corporations. Corporations typically must hold an annual meeting (and an initial meeting) of shareholders and directors, adopt bylaws and keep minutes of all corporate resolutions. While LLC members can have any meetings, they want and may keep minutes of all such events, these annual meetings are not necessarily required.
BE CAREFUL WITH YOUR PERSONAL RECORDS
You, as the LLC owner, must keep detailed records of all business expenses. These should be kept separate from personal finances. Careful record keeping is the only way you can limit your liability. To track business expenses, separate bank accounts and credit cards are necessary.
LLC TERMINATION
Most often, an LLC ceases to exist after a member leaves it. LLC termination contrasts with a corporation that exists regardless of who its shareholders are.
BANKING
A business checking account is required to separate your business and personal finances. These accounts are subject to a variety of fees and expenses. If a check is made payable to your LLC, it must be deposited in a business account. This type of deposit may be subject to additional fees from some banks.
UNDERSTANDING LLC REQUIREMENTS
LLCs are generally not required to hold annual meetings or keep minutes. They often times are not subject to the stricter record-keeping requirements of corporations. The operating agreement is the governing document for an LLC. It is here that members can set out essential provisions such as LLC governance and ownership. Operating agreements are internal documents and are not recorded by the state.
Protect your business assets with an LLC
Like a corporation, the LLC provides limited liability asset protection to its owners. The LLC usually owns the company assets and is separate from the personal assets of the LLC owners. The LLC would be sued if there were a lawsuit against the company. However, the LLC’s assets could be subject to the lawsuit. Notwithstanding, this would not be the same as the personal assets of LLC owners, which would be protected.
An LLC owner’s liability is limited to the amount they have invested in the LLC (e.g., initial investment, retained earnings). It is the same as buying stock in a corporation. The most common loss is the amount you paid for the stock. However, you will usually not lose more than this, regardless of how much the company may lose.
Your LLC’s Business Structure and Management
LLCs, unlike corporations, are more informal in their structure and management. The LLC’s business structure is the same as a partnership or sole proprietorship (in the case of a single-member LLC), with the limited liability protection discussed above. Management of an LLC is usually invested in all members. “Member” is the general term for LLC owners.
LLC owners or members are the ultimate authority and responsibility for all aspects. An LLC does not have separate roles like a corporation, which requires directors, shareholders, and officers. An LLC member can have all three corporate positions in one. However, LLC members can have any title they choose and may be willing to share responsibilities in any way that the members see fit. All members have full authority over member-managed LLCs.
The percentage ownership of an LLC is usually expressed in percentages (e.g., Mary and Bob each own 50% of M & B ENTERPRISES LLC) instead of the stock shares that a corporation would have. An LLC can also include another business entity.
Types of LLC
- Domestic LLC – If your LLC is established and is operating in your state, it is a domestic LLC. If your LLC is formed in their jurisdiction, it can be governed by the state.
- Foreign LLC – This does not mean the LLC was established internationally and is now operating in the US. You might form your LLC in Texas but operate your LLC here in Missouri.
- Member-Managed LLC – This type of LLC allows all members to operate the business equally. This type of LLC is the most popular.
- Managed LLC – This type of structure allows your business partners to be passive and help run the business. Managers can be either members or nonmembers.
- Single Member LLC – This is an LLC that has only one member.
- Multi-Member LLC – It is an LLC that has multiple members. Multi-member LLCs should be more careful when describing in detail in the LLC Operating Agreement each member’s rights in the event of a dissolution or death.
- Series LLC – A Series LLC is a unique form of LLC that acts as a master LLC or umbrella over several separate legal entities. The “Series” could be a group of members, assets or managers, or even interests.
Protect your business and protect yourself from personal liability
Entrepreneurs tend to be more concerned with day-to-day management and growth than the legal aspects. It is vital to incorporate your company and to create formal documents to protect yourself from personal liability.
Jason D. Smith, Attorney, handles all aspects of incorporation so that you can concentrate on your business. For assistance in forming your limited liability company, call Jason D. Smith at (417) 887-4949 – Ask for Jason.
