Pros and cons of a limited liability company (LLC)

The limited liability company is a relatively new kind of business structure in the United States, although in other parts of the world, such as Europe and South America, this type of business structure has been around for some time. Fundamentally, the limited liability company, or LLC, combines the best of other business structures to provide business owners with another kind of opportunity to structure their business.

Image credit: Pixabay

Here are a few pros and cons of the limited liability company:

Pros

Limited Liability: This aspect of the LLC is exactly what it says, the owners of the company are not financially responsible individually. Instead, the owners of the LLC are treated much like the owners of a corporation, the business is held liable, but in the event of debts or lawsuits, the individual owners are not personally liable and personal assets are protected. An exception to this would be if one or more of the LLC owners have proclaimed a personal guarantee that would stipulate them liable.

Profit Distribution: Partnerships generally have a 50/50 division of profits whereas the LLC can be flexible and dictate the terms of profit splitting between partners. LLC company owners can choose how the profits will be distributed amongst the profit sharers.

Less Formality than a Corporation: Corporations have to abide by a charter, have meetings and keep minutes and records of most everything. The LLC structure does not stipulate this requirement and as a result is easier to conduct business without all the formality that is required by corporations.

Tax Benefits: There are also many potential tax advantages for LLC businesses that partnerships or corporations may not have. Be sure and check with local tax laws and /or with a professional accountant who can give you the rundown of how choosing an LLC business structure can have tax benefits.

Cons

Limited Company Life: A business set up as a corporation can go on indefinitely regardless of who owns it, however, the LLC must dissolve when a member dies or goes bankrupt. If this is a risk not wanting to be taken because the longevity of the company is a priority, then the corporation structure may be a better fit.

Opening up Stocks: If a company has long-term plans to eventually go public, the LLC may not be the ideal choice because this may entail complications down the road if the company decides to expand or go in another direction with granting public stock options.

Lose Simplicity: LLCs have more paperwork and technicalities than business structures such as proprietorships or partnerships. While the LLC has advantages in this area because it is simpler than a corporate structure, it can also work to a disadvantage too.

Tax Disadvantages: While there are tax advantages, there are also a few potential tax disadvantages too. Check with local laws and a professional to determine if the disadvantages of structuring the business as an LLC will outweigh the advantages. If so, another structure of business may be preferable.

Lack of Uniform for LLC Structures: Companies that operate interstate may find themselves running into problems because the stipulations for LLCs are not consistent from state to state in the U.S.

There are many pros and cons to establishing an LLC. Before choosing your business structure, it is a good idea to understand the basics of limited liability corporations and then list the pros and cons and then decide if the LLC is right for your company.