What are the benefits and downsides of an LLC?

On Behalf of | Jul 26, 2021 | business formation | 0 comments

As an aspiring entrepreneur or business owner, one of the first steps you face is deciding what form of business organization (also known as a business entity) to choose for your business. Each one has its own benefits. At the same time, they all have drawbacks, too.

It is important to comb through each possible business entity form in order to consider whether the pros outweigh the cons. You may wish to start with a limited liability company (LLC) form, which is one of the most popular forms of business organizations.

The pros of LLCs

Fit Small Business discusses how LLCs can benefit you and what their weaknesses are. The biggest benefit is in the name: limited liability. With an LLC, you are able to separate your personal finances and assets from your business assets. This means if your business ends up going under, the business entity can file bankruptcy without that affecting your personal financial standing beyond the amount you originally invested.

LLCs also offer more flexibility in many ways. You have more possible ways of structuring ownership of the entity by its membership.  Management options can be very flexible. On top of that, LLCs have a relatively easy filing process.

The cons of LLCs

Despite the ease of filing the formation papers, preparation of an appropriate operating agreement is a challenge best left to an attorney. Additionally, the LLC has to pay annual franchise taxes that can differ wildly based on the states the business operates in. While some LLCs only have to pay $10 or less in these taxes, others have to pay hundreds. As an annual expense, this can add up quickly.

If you want a lot of investment options, an LLC may not suit your purposes either. LLCs often do not gain outside investment in the business. Outside investors tend to be more comfortable investing in a corporation.

If you want to learn more about other benefits and downsides, consider contacting legal help.