LLC stands for Limited Liability Company. It is one of the most popular businesses in the US, as it is easy to form and run. A business LLC means the owner has limited legal and financial liability for the business. It is like a hybrid of a corporation and sole partnerships. It is beneficial in protecting the owner’s assets in case of a lawsuit. Let’s understand its pros and cons in more detail.

Pros

1. Tax benefit
The IRS regards single-member LLCs as disregarded entities and multi-member LLCs as general partnerships. Both have the benefit of pass-through taxation. This means the business LLC does not have to pay corporate tax like corporations. The profits earned are to be reported by the owners in their tax returns. They are only taxed once at each member’s tax rate, avoiding the double taxation system.

2. Easy to set up
A benefit of business LLC is that it is easy to start and run. Corporations require a lot of investment, and it is pretty expensive to set up. But for an LLC, all you need to do is file an application under the Articles of Association and draft an operating agreement. In contrast, a corporation set-up requires having shareholders meetings, appointing the board of directors, accounting corporate minutes, filing of annual tax returns, etc. You may not even need an attorney to form an LLC. The paperwork is easy, and you can file it yourself for about $50 to $500, depending on the location.

3. Flexible and private
A business LLC has the advantage of the flexible income distribution. This means that the profit generated by the LLC does not necessarily have to be divided equally or in a ratio of partner’s capital contribution. They are free to divide the profit however the LLC owners deem appropriate. But this ratio should comply with the Internal Revenue Service’s rule on partnership income distribution. LLCs also have the benefit of privacy in some states, unlike sole proprietorships. Some LLCs are not required to list their members on the formation documents; you may have to list a manager instead.

Cons

1. Problems with raising capital
You can raise funds either through equity or debt, just like a corporation. In equity, you need to sell a stake of your business, which means adding one or more members and distributing your profit. Also, there is a low investor appeal in LLCs over corporations, so finding one is challenging. This leaves the option of debt financing by requesting a bank loan. Banks are generally skeptical about approving a large sum to a new business. Even if you secure a loan, paying a regular interest rate out of profit is difficult.

2. Owners must immediately recognize profit
A corporation is not entitled to distribute its profit immediately. It can be withheld and reinvested into the company or distributed as dividends to its shareholders. So corporations are not always taxed on their profits. For LLC in business, they must immediately distribute the profit or reinvest each year. They do not have the option to hold their profits. Salaries and profits are subject to self-employment taxes, which is around 15%.

3. Fewer benefits
Most US states require the company to set a limit for the company’s existence. Even if that is absent, a single-member LLC automatically dissolves if the owner dies or withdraws from the company. Transferring ownership is costly and difficult. Employees of LLCs are taxed on their income and receive fringe benefits like medical insurance. Also, for certain businesses, like banks and insurance companies, forming an LLC is not an option under the law.