LLC Advantages and Disadvantages

The following is a sample article written by ContentWriters for a client in the business industry. 

What is an LLC?

An LLC or limited liability company is a business form that is a hybrid of a sole proprietorship or partnership and a corporation.  In an LLC the personal assets of the owners are protected from being used to fulfill the debts and obligations of the business in a similar manner to the protection that is offered by a corporation.

However, the LLC is taxed in the same way as a sole proprietorship or partnership; the LLC is subject to pass through taxation instead of double taxation.

The Advantages of Forming an LLC

Forming an LLC protects the personal assets of the owners from being liable in the event of a lawsuit.  This legal protection is one of the primary reasons for forming an LLC.  There are certain exceptions to the limitation of liability; in the event that the owners commit criminal acts or fail to comply with the rules for proper management of the LLC, the assets of the owners could become liable.
LLCs are not subject to the double taxation that affects C corporations.  This means that LLCs do not pay federal taxes.  Instead, the profits and losses of the business pass through to the shareholders.  Thus, the LLC is similar to an S corporation in this regard.

LLCs differ from S corporations in that they have more flexibility to allocate the profits and losses of the business to certain owners.  Unlike the S corporation which can only issue one type of stock by which to allocate profits and losses, in an LLC profits and losses can be allocated via the operating agreement to any of the owners how they see fit.

In addition, LLCs are not subject to the same corporate formalities to which C corporations and S corporations must adhere.  LLCs are not required to have a board of directors or shareholder meetings.  Furthermore, they are not subject to the same reporting requirements as corporations.  Thus, LLCs are must easier to operate. 

The Disadvantages of Forming an LLC

The laws for LLCs vary from state to state, however, an LLC is obligated to comply with the laws of each state in which it does business.  It can be time consuming to find out the laws for LLCs in each state in which the business operates and ensure that all of these laws are complied with in each state.  For this reason, some LLCs form subsidiaries to operate in different states.  

Furthermore, LLCs cannot raise capital as easily as corporations.  They cannot simply issue stock to generate capital.  There are significant requirements to adding a member to an LLC which make it prudent to have all investors involved in the business upfront.

In addition, there are limitations on the types of businesses that can form LLCs.

These limitations vary from state to state.  Therefore, whether or not your business can form an LLC depends upon which state you live in.  

Moreover, the laws regarding LLCs are not as thoroughly spelled out as they are for corporations.  There are still a number of areas regarding LLCs for which case law has not been established.  This leaves an LLC vulnerable to an unexpected court ruling.

It’s important to note that for an LLC to survive the departure of one of its members, its intention to do so must be written clearly into the operating agreement.  Furthermore, LLCs may be required to publish an announcement that the business has been formed in order to satisfy state requirements.
 

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