Below are the advantages and disadvantages of an LLC compared to other business
structures.
Advantages of an LLC
How much will it cost to get started?
Every state charges a fee to form a limited liability company, or LLC, and the amount required
can vary in each from $50 to $500. The nationwide average cost falls between $150 and $200.
Find out more about the specific fees charged in your state on your state’s business filing
agency’s website. Once the initial fee is paid, there are additional costs you can expect
including the fee to reserve a business name and expedited processing fees.
Pass-Through Taxation
The IRS does not recognize a specific tax treatment for an LLC. Instead, by default an LLC is
taxed as a sole proprietorship if it has one member or as a partnership if it has more than one
member. In both cases, the LLC’s profits and losses are passed through to the owner(s). Each
owner reports their share of corporate gain or loss on his or her tax return and pays taxes
for the LLC at his or her personal tax rate.
Partnership Taxation
You might be wondering in what proportion the profits and losses of the LLC pass-through to the
tax returns of multiple owners. The most common basis is to divide shares proportionate to the
ownership percentage of each member. One advantage of an LLC is to describe in the Operating
Agreement some other basis of allocation.
Tax Flexibility
The IRS does not recognize a specific tax treatment for an LLC. Instead, by default an LLC is
taxed as a sole proprietorship if it has one member or as a partnership if it has more than
one member. Most LLCs stick with this default pass-through tax treatment when they are just
starting out. However, as the business grows, an LLC can often save money by electing a new
tax treatment with the IRS. An LLC elects S-Corporation tax treatment to start saving on
self-employment taxes. Eventually the LLC elects C-Corporation tax treatments when the savings
from income splitting and deducting benefits outweigh the additional cost of corporate
double-taxation.
Number of Owners
In most states, an LLC can be owned by just a single member or have multiple members.
Protect Investors
Investors often require a business structure offering them limited liability prior to
investing.
Administration
An LLC requires less record-keeping, administration, and formalities than a corporation.
Disadvantages of an LLC
Lack of Case Law
The first US LLC appeared in Wyoming in 1977. Adoption by states of the LLC structure continued
into the 1990s. As such, compared to the history of case law upholding the protections of
corporations, the history of case law upholding the protections of LLCs is still rather small.
Ample Governance
The flexibility with which you can specify in the LLC Operating Agreement the governance of the
LLC is often an advantage; however, LLCs can run into problems when neither statutory code nor
the Operating Agreement set forth ample provisions.
Choice of Court
LLCs are regulated by state law, but what about when you have a dispute crossing state
boundaries? For the purposes of federal civil procedure, LLCs are treated as partnerships not
corporations. One way this can manifest is it can restrict the choice of which state court will
hear the dispute.
Attract Investors
While LLCs offer investors limited liability, investors might be more accustomed or comfortable
investing in the established governance and structure of a corporation. Only corporations can
pave the way to an IPO.
State Renewal Fees
Certain states require reports, filing fees, and franchise tax either annually, biennially,
or decennially.
International Taxation
United States LLCs are often recognized as corporations in other countries where they will
pay corporate taxes.
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