Some ADVANTAGES of forming a Limited Liability Company are:
- Provides protection of personal assets from business debts and other obligations;
- Profits/losses pass through to personal income tax returns of the members;
- Provides great flexibility in management and organization of the business;
- LLCs do not have the ownership restrictions of S Corporations, making them ideal business structures for "non-traditional"
Some DISADVANTAGES of forming a Limited Liability Company are:
- LLCs often have a limited life (not to exceed 30 years in some states)
- The state of Massachussetts requires at least two members to form an LLC (whereas all corporations can have one shareholder);
- LLCs are not corporations and therefore do not have stock, thereby creating some difficulty in both the transfer of ownership of the company and/or the distribution of benefits.
The Standard Legal Software LLC program includes the Articles of Organization and all of the other state-specific forms and up-to-date instructions required to create a Limited Liability Company. The program also includes three different types of Operating Agreements:
- Multi-Member MEMBER-Managed Operating Agreement;
- Multi-Member MANAGER-Managed Operating Agreement;
- Sole Member Operating Agreement
Offering three different Operating Agreements allows the members of the LLC to clearly define the roles of each investor/member in managing and operating the business, and how profits will be disbursed. The software also includes a LLC Unit Certificate template that can be completed and provided to each member of the LLC, showing the number of "units" (like shares) that are held by that member.
In addition to the required forms and instructions, a detailed examination of a variety of business structures is provided, so that the members creating the LLC can make certain that an LLC structure is the best for their business situation.
A Limited Liability Company (LLC) protects your assets like a corporation, but without the burden of corporate maintenance. (Compare: LLCs vs Corporations.)
With a LLC, you can elect to be taxed as a corporation, or avoid "double taxation" by choosing to be a "pass-through"
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Comparing an LLC to a Corporation
The decision to form an LLC or a corporation is a common debate among business owners that deserves careful consideration. While both are excellent choices for personal liability protection, each entity offers its own set of distinct advantages. Choosing the right one for your company depends on your particular business, operational needs and tax strategy.
Advantages of an LLC compared to a corporation
Fewer corporate formalities.
Corporations must hold regular meetings of the board of directors and shareholders, keep written corporate minutes and file annual reports with the state. On the other hand, the members and managers of an LLC need not hold regular meetings, which reduces complications and paperwork.
No ownership restrictions.
S corporations cannot have more than 100 stockholders, and each stockholder must be a U.S. resident or citizen. There are no such restrictions on LLCs.
Ability to use the cash method of accounting.
Unlike C corporations, which often must use the accrual method of accounting, most limited liability companies can use the cash method of accounting. This means income is not earned until it is received.
Ability to place membership interests in a living trust.
Members of an LLC are free to place their membership interests in a living trust. It is difficult to place shares of an S corporation into a living trust.
Ability to deduct losses.
Members who are active participants in the LLC’s business can deduct its operating losses against the member's regular income to the extent permitted by law. Shareholders of an S corporation are also able to deduct operating losses, but shareholders of a C corporation are not.
Tax flexibility.
By default, LLCs are treated as a "pass-through"
Disadvantages of an LLC compared to a corporation
Profits are subject to Social Security and Medicare taxes.
In some cases, LLC owners may end up paying more taxes than owners of a corporation. Salaries and profits of an LLC are subject to self-employment taxes, currently equal to a combined 15.3%. With a corporation, only salaries (and not profits) are subject to such taxes. This disadvantage is most significant for owners who take a salary of less than $90,000.
Owners must immediately recognize profits.
A C corporation does not have to immediately distribute profits to its shareholders as a dividend. This means that shareholders in a C corporation are not always taxed on the corporation's profits. Because an LLC is not subject to double-taxation, profits are automatically included in a member's income.
Fewer fringe benefits.
Employees of an LLC who receive fringe benefits, such as group insurance, medical reimbursement plans, medical insurance and parking, must treat these benefits as taxable income. The same is true for employees who own more than 2% of an S corporation. However, C corporation employees who receive fringe benefits do not have to report these benefits as taxable income.
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