Advantages and Disadvantages of an LLC

by admin on January 12, 2013

in Administrative

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SOME OF THE ADVANTAGES OF A LIMITED LIABILITY COMPANY:

1. Pass-through taxation – Profits taxed at the member level, not at the LLC level.

2. An LLC can elect to be taxed as a sole proprietor, partnership, S-Corporation or C Corporation, providing much flexibility.

3. There is no requirement of an annual general meeting for shareholders in most states.

4. There’s no board of directors. An operating agreement is established to provide a centralization of management.

5. An LLC is an enduring entity which survives the deaths of the owners which avoids problems developing from the owners death or incapacitation.

6. Less record keeping and paperwork.

7. Membership interests can be assigned.

SOME OF THE DISADVANTAGES OF A LIMITED LIABILITY COMPANY:

1. Earnings of most members of an LLC are generally subject to self-employment tax. With an S Corporation earnings, after paying a reasonable salary to the shareholders working in the business, can be passed through as distributions of profits and are not subject to self-employment taxes.

2. If an LLC is established as  a partnership for Federal income tax purposes, and if 50% or more of the capital and profit interests are sold or exchanged within a 12-month period, the LLC will terminate for federal tax purposes.

3. If more than 35% of losses can be allocated to nonmanagers, the limited liability company can lose its ability to use the cash method of accounting.

4. There is a lack of uniformity among limited liability company state statutes. If a business operates in more than one state it may not receive consistent treatment.

5. In order to be treated as a partnership, an LLC must have at least two members. An S Corporation can have one shareholder. Although all states allow single member LLCs, the business is not permitted to elect partnership classification for federal tax purposes. The business files Schedule C as a sole proprietor unless it elects to file as a corporation.

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