Skip to main content

Pros and Cons of Becoming an LLC

If you are a small business owner and are contemplating becoming an LLC, consider your risks and be aware of the pros and cons of the process. Following are some factors that may help you decide:

Pros

  • Legal protection: The primary advantage of becoming an LLC (limited liability company) is that your personal liability gets limited. So, in case a loan is taken or a debt is incurred for business, the responsibility to repay it is on the business. This way, in case of lawsuits, your personal assets would be protected from being held up as assets that could be held for the recovery of the outstanding amount.
  • Easier to conduct proceedings: By becoming an LLC, you can enjoy liability protection from business debts and lawsuit judgments just like a corporation, but enjoy fewer board meetings, easier management of minutes and the like as you don’t need to run your business with the legal requirements applicable for a corporation. So, if you want, you can even do away with most of the paperwork, record-keeping requirements, meetings of board directors or shareholders etc. No wonder that small business owners find it very useful to enjoy this breathing space offered by an LLC.
  • Tax benefits: By becoming an LLC, you can enjoy several tax benefits. Unlike corporations where you experience double taxation while paying corporate tax on your business income and again while paying dividends to your shareholders, an LLC averts the situation of paying taxes twice. Since the members (owners of LLC) are subject to self-employment taxes, you even stand the chance to enjoy certain tax-favored fringe benefits.
  • No limit on the number of members: 5 or 50 – you can have your choice when it comes to deciding on how many members you want the LLC to have. Even a lone person can form an LLC all by himself/herself.

Cons

Like everything else, LLCs too have their drawback as well:

  • Not every business can become an LLC: Some specific businesses like insurance companies or banks are not allowed to form LLC. Some states even disallow certain professions from forming LLCs. For example, if you have a firm of architects or accountants in California, you can’t become an LLC.
  • Different rules of taxation: Though you may get lured by the tax sops that an LLC generally brings your way, it’s better to check with your state and know about the tax implications before taking the plunge. While some states charge a flat fee or special tax against LLCs, some others may have a sliding scale based on the number of owners or the share of revenue. So, check out to have a clear idea of what your tax liabilities and benefits, if any, will be.
  • May not attract investors: You can’t take your LLC to the public. Even when your business starts  making a lot of money, you can’t get it listed on any stock exchange as a limited liability company does not have any stock. Since most venture capitalists tend to expect an initial public offering at some point or the other, your LLC may fail to attract investors due to its sheer limitations.

So, judge both sides of the coin before deciding on whether you would like to take the plunge or not.