LLC: Pros and Cons

What is an LLC?

An LLC refers to a Limited Liability Company. As the name suggests, a Limited Liability Company possesses limited liability for its owners. An LLC is a flexible form of a business organization that combines the various elements of a partnership with the fundamental characteristics of corporate structures.

A Limited Liability Company is a legal form of enterprise that offers limited liability to the managers or owners of the business structure. In the majority of localities or states, the formation of a Limited Liability Company does not need to be organized as a profit-based business model to incur the various legal benefits that a Limited Liability Company receives.

A Limited Liability Company is in essence a hybrid company; the business entity possesses certain characteristics of both a partnership and a corporation or sole proprietorship. The mixture of characteristics taken from other business classifications is dependent on how many owners are present in the underlying organization. Although a Limited Liability Company is classified as a formal type of business entity, it is more closely aligned (based on fundamental characteristics) to an unincorporated association.

The primary characteristic of a Limited Liability Company, to align itself with the broader definition of a partnership, is that both enterprises have the availability of pass-through income taxation. This fundamental characteristic (the income earned by the entity flows through to investors or owners) offers more flexibility for the owner of a Limited Liability Company.

How is an LLC Taxed?

The United States Federal Income tax regards a Limited Liability Company as a pass-through entity. If the entity contains only one member, it is regarded (through federal interpretation) as a “disregarded entity” for the purpose of taxation.

As a result of this classification, the owner of the LLC will report the income of the entity on his or her own tax return. The income earned through an LLC is reported on the Schedule C tax form. For a Limited Liability Company with multiple members, the entity is treated as a partnership for taxation purposes. As a result, they must file the IRS Form 1065 to legally file their taxes.

Individual owners who experienced a loss during a taxable year of operation would receive a K-1 for their losses. The primary benefit of an LLC is realized through the structure’s flexibility. As an option, a Limited Liability Company may also be taxed like a corporation through the filing of the IRS Form 8832.

Advantages of an LLC

An LLC may be legally taxed as a partnership, a sole proprietor, a C-corporation, or an S-corporation.

The members of an LLC are protected from all or some liability acts, including the debts incurred from the business operation.

In some states an LLC may be established with just one person or member involved.

An LLC owns all intellectual property associated with the entity.

Disadvantages of an LLC

A Limited Liability Company often faces more challenges in regards to raising capital.

Creditors may require the LLC to guarantee the fulfillment of any loans offered to the LLC.

The renewal fees associated with an LLC are often more expensive than other forms of businesses.