LLC Advantages Disadvantages - The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.
The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration. LLC's must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests.
LLC Advantages Disadvantages
LLC AdvantagesA limited liability company (LLC) has many advantages as a form of business entity:
Pass through taxation - under the default tax classification, profits taxed at the member level, not at the LLC level - no double taxation.
Limited liability - the members (owners) of the LLC, are protected from liability for acts and debts of the LLC.
An LLC can elect to be taxed as a sole proprietor, partnership, S-corp or corporation, providing the correct option for your business.
Can be set up with just one natural person involved or, in some states, one owner which may be an business itself.
No requirement of an annual general meeting for shareholders (in some states, such as Tennessee and Minnesota, this statement is not correct).
No loss of power to a board of directors (although an operating agreement may provide for centralization of management power in a board).
LLCs are enduring legal business entities, with lives that extend beyond the illness or even death of their owners, thus avoiding problematic business termination or sole proprietor death.
Much less administrative work and recordkeeping.
Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest.
Earnings of most members of an LLC are generally subject to self-employment tax. By contrast, earnings of an S corporation, after paying a salary to the shareholders working in the LLC, can be passed through as distributions of profits and are not subject to self-employment taxes.
Since an LLC is considered a partnership for Federal income tax purposes, 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.
If more than 35% of losses can be allocated to nonmanagers, the LLC may lose its ability to use the cash method of accounting.
An LLC which is treated as a partnership cannot take advantage of incentive stock options, engage in tax-free reorganizations, or issue Section 1244 stock.
There is a lack of uniformity among LLC statutes. Businesses that operate in more than one state may not receive consistent treatment.
In order to be treated as a partnership, an LLC must have at least two members. An S corp 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.
Some states do not tax partnerships but do tax LLCs.
Minority discounts for estate planning purposes may be lower in a limited liability company than a corporation. Since LLCs are easier to dissolve, there is greater access to the business assets. Some experts believe that LLC discounts may only be 15% compared to 25% to 40% for a closely-held corporation.
Conversion of an existing business to LLC status could result in tax recognition on appreciated assets
Professional Limited Liability Company
Same advantages as a regular limited liability company
Gives state-licensed professionals a way to enjoy those advantages
Same as for a regular limited liability company
Members must all belong to the same profession
Limited Liability Partnership
Mostly of interest to partners in old-line professions such as law, medicine, and accounting
Owners (partners) aren't personally liable for the malpractice of other partners
Owners report their share of profit or loss on their personal tax returns
Unlike a limited liability company or a professional limited liability company, owners (partners) remain personally liable for many types of obligations owed to business creditors, lenders, and landlords