While it may be relatively new compared to other corporate structures, the LLC (limited liability corporation) is now one of the most popular forms of incorporation for many types of businesses. This article is designed to help show you the benefits, and limitations, of deciding to form or reorganize your company as an LLC.
The LLC is becoming the most common form of corporate structure, and for several notable reasons:
- Asset protection — One of the most common reasons for small businesses to incorporate as an LLC (as opposed to operating under a more informal structure), is personal asset protection. Should there be a reason that an LLC cannot afford to pay its debts, its owners will not be held responsible to pay them off with their personal assets, assuming that the company is in compliance with all the legal requirements involved in running the LLC.
- More relaxed regulation — Any type of incorporation involves at least some amount of paperwork and administrative effort. LLCs typically demand fewer formalities than other corporate structures.
- Favorable tax implications — LLCs are eligible for pass-through taxation, which means that the company’s profits and losses are reported on the owner’s personal income taxes. LLCs are not taxed on their income at the business level.
- Fewer ownership restrictions — LLCs have a very lax set of restrictions regarding ownership. An LLC can have any number of owners, and those owners do not have to be legal citizens of the United States. LLCs can also be owned in part or in full by other subsidiary businesses or trust organizations.
- Increased credibility — Incorporating in any form can provide a great deal of credibility among both potential clients and creditors. It shows that you have taken the effort to operate within a set of legal regulations and requirements, and provides a clear legal entity that can be held accountable for debts or unsatisfactory service.
- Flexible management — Other corporate structures require a formal management hierarchy to be put into place in order to formalize who is charge of company decision making. LLCs are able to forgo many of these processes, which makes the structure a logical choice for many smaller businesses.
Like all corporate structures, the LLC also has drawbacks:
- Paperwork and fees — While LLCs are free from a great deal of the paperwork and regulatory fees involved in establishing and maintaining other corporate structures, there is still some level of administrative work required. While it varies from state to state, these requirements can include special fees, taxes, or the filing of an annual report. However, any financial obligations are typically very affordable, and the paperwork is negligible for most companies.
- Difficulty transferring ownership — While nearly anyone can be part of an LLC’s ownership structure, selling or transferring that ownership can be difficult. Changes in an LLC’s ownership structure must be approved by all of its owners.
- Little legal precedence — The LLC is still a relatively new corporate structure. As a result, there is little legal precedent regarding matters involving LLCs. This often causes legal disputes involving LLCs to be lengthy affairs; it can be difficult to predict final rulings.
Swyft can help!
If you’re interested in forming an LLC, contact one of our business professionals today.We can help!