Advantages and Disadvantages of an LLC

On behalf of Brewer, Pritchard & Buckley, P.C. posted in business formations on Tuesday, August 28, 2018.

If you are forming a business, there are many options as to how to proceed. Your choices will depend on the nature of your business, the number of partners, the financing, and how much liability protection you need. Sometimes a simple partnership is adequate, but in other cases a distinct legal entity known as a limited liability corporation (LLC) is your best choice.

In all cases, it’s important to consult with an experienced business attorney to help you decide what is best for you. But if you are considering an LLC, there are many advantages and disadvantages which might steer you in this direction.

The advantages

An LLC is a distinct legal entity from its owners, and as such it offers a number of protections. These can be a great advantage for many business owners. They include:

Should your business incur debt or become the subject of a lawsuit, the partners personal assets are protected.

  • It is flexible, and allows for the governing partnership to change easily.
  • Registration is quite simple. All it takes is registration with the Secretary of State.
  • The operation can scale as your start-up grows, creating fewer headaches.

For these reasons, entrepreneurs in Texas often find that the LLC is the preferred way to go when they are organizing their start-up.

The disadvantages

The distinction between the partners and the LLC has its own drawbacks, however. These can become a headache if not thought through properly. They include:

  • Tax rates may be higher, since an LLC is a “pass-through” to your personal income. With lower corporate tax rates, the top bracket on individual taxes is now higher than with a corporation. In addition, personal income is also subject to the self-employment tax.
  • Roles need to be carefully defined in the LLC agreement. Confusion about who is in charge can cause disputes among partners and investors alike. It is especially critical that the operating agreement be carefully drafted with consideration of the exact responsibilities of each partner

Consultation is the key

In all cases, an LLC requires consultation with an experienced business development attorney before proceeding. It requires a solid understanding of your goals, your investors, and the applicable laws to make the right choice for your start-up.

Ultimately, the various advantages and disadvantages should point you to a clear understanding of what is best for your new business. The few relative disadvantages of an LLC are often well covered by carefully planning at the time of formation.