In order to determine if an LLC is the right company structure for you, it’s important to learn what precisely an LLC is. While it is easy to get an LLC, or limited liability company, mixed up with a corporation, it would be a mistake to do so. The terms aren’t interchangeable and unless you realize why this is, you might as well pick a company structure out of a hat!
Basically, an LLC features the best of two worlds: it’s part partnership and part corporation. The owners deal with profits, losses, and taxes directly, yet the company isn’t rendered a separate entity – except in the sense that liability is taken off the shoulders of its members. The LLC structure avoids some of the bureaucratic and tax problems that corporations face, but because it is so new to the United States, it still has a few hiccups and isn’t always best for large-scale companies.
Benefits of an LLC structure:
· No double taxation! Because of the partnership setup, wherein the members are focused on more directly by the government, there is pass-through taxation. An LLC can be taxed as a corporation, however, if its owners so choose.
· Less paperwork and less meetings! This is probably one of the brightest aspects about an LLC. Because it is unincorporated, there are a great deal less “requirements” of it. Those operating an LLC have significantly more control over how they choose to manage the company.
· An LLC has the same basic perk of a corporation – limited liability. Limited liability is where its at, and as implied in the name – “limited liability” company, you get this too.
Why an LLC structure may not be ideal:
· Some LLC’s simply can’t escape a heavy tax burden because of the state they’re in. Many states, including New York, Texas, and California, greet LLC’s with a frustrating franchise tax.
· LLC’s are often strange and foreign sounding to people. Shareholders, members, and even local legislatures aren’t quite used to LLC’s yet. While LLC’s have been popular in other countries for years, they’re relatively new to America. This means that investors are not always attracted to LLC’s, members don’t always know what to do with themselves and are often confused about what their roles are, and because there aren’t as many rules, LLC’s are more vulnerable to falling apart.
· In some states, the laws are such that an LLC is pointless and the end goals of avoiding double taxation and protecting its members are impossible.
So is an LLC the right structure for you? For small companies with leaders who are good at making up their own rules, an LLC is recommendable. However, if your company is unfortunate enough to be in a state that is slow to reward LLC’s, it could be the kiss of death to your business success. For bigger companies that may benefit from the simple organization of a corporation or for companies trying to succeed in states that aren’t friendly to LLC’s, the conventional corporate structure is a better fit.
The bottom line is: LLC’s are right for some and totally wrong for others