The Pros and Cons of a Limited Liability Corporation
Tuesday, Apr 15, 2008
In the history of American business, the Limited Liability Corporation (LLC) is a relatively recent option. In 1997, the state of Wyoming was first to enact LLC in the U.S. Since that time, it has become one of the more popular forms of business organization.
“LLCs offer a more flexible taxation option. The owner can choose a tax arrangement as a sole proprietorship, a partnership, an S corporation or a C corporation.”
What Is A Limited Liability Corporation?
Limited Liability Corporations offer business owners a little more flexibility than sole proprietorships or full-blown corporations. As the name implies, the owner or owners of the business have limited liability for the actions of the business, unlike sole proprietorships in which the owner is usually 100 percent liable.
LLCs can be created for either brick-and-mortar companies or companies that exclusively use the Internet as a source of income. A good example of an online-only business is affiliate marketing.
The Pros Of A Limited Liability Corporation
The members of the Limited Liability Corporation are not personally responsible for any legal judgments awarded against the company -- therefore their personal assets are protected. In the world of affiliate marketing, this can help protect you if a customer uses your affiliate link and tries to perform fraud on the advertising merchant. The LLC organization protects members against legal action stemming from their own LLC as well.
LLCs offer a more flexible taxation option. The owner can choose a tax arrangement as a sole proprietorship, a partnership, an S corporation or a C corporation.
Unlike a corporation, an LLC does not have to have annual shareholder meetings or a board of directors.
The elected manager of the LLC receives certain tax benefits, as the active owner. The elected manager's share of the company's bottom-line profit gets treated as earned income and as such, the managing member is entitled to deduct 100 percent of his or her health insurance premiums. The IRS does not consider the bottom-line profit share of the other members of the LLC as earned income, so he or she is not subject to self-employment tax.
Members can loan the LLC money for its operations if it needs it, and then manage the repayment of the loan plus applicable interest.
If one of the members of the LLC passes away, the company can continue as long as the remaining members unanimously vote for that to happen.
There is much less paperwork or record keeping with a Limited Liability Corporation compared to a traditional corporation.
Lilacs allow for flexible distribution of profits and losses. For example, in the world of affiliate marketing, if one member will be handling the task of the primary start-up of the business, like setting up and maintaining the blogs or websites, the LLC may choose to give that person a higher percentage of the profits for the time spent working on the business. After the agreed-upon time frame ends, the future profits will then be distributed evenly among the members.
The Cons of LLC
Some states will charge LLCs a franchise tax. This is the LLC paying the state for the privilege of having limited liability. The amount of the fee varies among the states, as some base it on revenue while others just charge a flat fee.
It can be difficult for the LLC to raise financial capital. Most investors don't feel comfortable investing in a company without shareholders or a non-incorporated business.
The members of the LLC cannot be paid wages. In addition, the manager's share of the profits is subject to self-employment tax.
