A limited liability company, also called an LLC, is a business structure that combines the advantages of a partnership with the liability protection of a corporation. An LLC can have one or more owners, who are called members. Members of an LLC can be individuals or businesses, and there isn’t a limit to the number of members an LLC can have. Like all business types, LLCs offer both advantages and disadvantages. Below is an overview of the pros and cons of LLCs.
Pros of LLCs
Structuring your business as an LLC has many advantages, including:
Limited liability: Members of an LLC aren’t personally liable for actions of the organization. This means that an LLC member’s personal assets are safe from creditors seeking to collect from the business. However, as discussed below, this protection only remains in place if members keep their business and personal finances separate.
Pass-through taxation: An LLC is a pass-through entity. This means that the profits of an LLC go directly to its members without being taxed on the company level. Instead, an LLC is taxed on its members’ personal income tax returns. Paying taxes in this manner is much easier than paying corporate taxes.
Flexibility: Members of an LLC may either manage it themselves or hire someone else to do it. This gives LLC members the opportunity to share the responsibility of day-to-day decision-making and provides members with a level of flexibility that isn’t available with other business structures.
Cons of LLCs
Although LLCs have many advantages, this type of business structure is not without its cons. Disadvantages of LLCs include:
Assets are not protected under certain circumstances: As noted above, an LLC protects the assets of its members. However, this only applies if the members do everything correctly. If a member of an LLC fails to clearly separate business transactions from personal transactions, a court can “pierce the corporate veil” and go after a member’s personal assets.
Self-employment tax: An LLC is taxed the same as a partnership unless its members opt to be taxed as a corporation. When the IRS taxes an LLC as a partnership, the government considers its members to be self-employed. This means that LLC members are personally responsible for paying Medicare and Social Security taxes, which are collectively known as self-employment tax. The amount of self-employment tax owed is based on an LLC’s total net earnings.
Contact a New York Business Formation Attorney
Running a successful business requires experience, planning, and specialized knowledge. Therefore, if you need assistance with your New York business’s legal needs, our New York business formation attorney is on your side. At the Law Office of Angela Siegel, our experienced business formation attorney assists business owners in the formation of legally sound business entities and help entrepreneurs devise winning business strategies. Please contact us today to schedule a consultation.