Going solo or teaming up? Make sure you're not on the hook for business liabilities with an LLC.
Better for max flexibility in how you manage and run your business; board of directors not required
What Is an LLC? Pros and Cons of a Limited Liability Company
A limited liability company is a business structure that carries a number of pros and cons for business owners.
An LLC, or limited liability company, is a U.S. business structure that combines the simplicity, flexibility and tax advantages of a partnership with the personal liability protection of a corporation. Owners of LLCs are called members.
What is an LLC?
An LLC can have one or many “members,” the official term for its owners. Members can be individuals or other businesses, and there is no limit to the number of members an LLC can have. With an LLC structure, members' personal assets are protected from the business's creditors.
Millions of U.S. businesses identify as LLCs. Here are the advantages and disadvantages of an LLC so you can determine the right structure for your business.
Benefits of an LLC
Structuring your business as an LLC offers a number of advantages.
Limited liability
Members aren’t personally liable for actions of the company. This means the members’ personal assets — homes, cars, bank accounts, investments — are protected from creditors seeking to collect from the business. This protection stays in as you run your business on the up-and-up and keep business and personal financials separate.
Pass-through federal taxation on profits
Unless it opts otherwise, an LLC is a pass-through entity, meaning its profits go directly to its members without being taxed by the government on the company level. Instead, members pay tax on the profits on their own federal income tax returns.
Management flexibility
Members can manage an LLC, which allows all owners to share in the business’s day-to-day decision-making. Alternatively professional managers, who can be either members or outsiders, can manage the business. This is helpful if members want to hire people who are more experienced running a business.
In many states, an LLC is member-managed by default unless explicitly stated otherwise in filings with the secretary of state or the equivalent agency.
Easy startup and upkeep
Initial paperwork and fees for an LLC are relatively light, though there is wide variation in what states charge in fees and taxes. The process is simple enough for owners to handle without special expertise, though it’s a good idea to consult a lawyer or an accountant for help. Ongoing requirements usually come on an annual basis.
Disadvantages of an LLC
Before registering your business as an LLC, consider these possible drawbacks.
Limited liability has limits
A judge can rule that your LLC structure doesn’t protect your personal assets. The action is called “piercing the corporate veil,” and you can be at risk if, for example, you don’t clearly separate business transactions from personal transactions or if you run the business fraudulently in ways that caused losses for others.
Self-employment tax
The IRS considers LLCs as partnerships for tax purposes, unless members opt to be taxed as a corporation.
Consequences of member turnover
In many states, if a member leaves the company, goes bankrupt or dies, the LLC must be dissolved and the remaining members are responsible for all remaining legal and financial obligations necessary to terminate the business. These members can still do business, of course; they’ll just have to start a whole new LLC from scratch.
How to form an LLC