When it comes time to form a business, there are a number of considerations that need to be made. One of the most important decisions involves the method of incorporation that you choose. The most popular type of incorporation method for a small business is a limited liability company or an LLC. This is often the desired option for small businesses that are not necessarily looking to expand in the future. There are both advantages and disadvantages associated with choosing LLC as the incorporation method for your business. Before you decide to establish and LLC, you should be aware of both the pros and cons.
The Advantages of a LLC
1. Limited Liability
The biggest advantage of this corporation method can be seen in the name. The fact is that this method gives small business owners access to limited liability. This is a benefit that offers protection to the owner of the small business in the event that a lawsuit is filed. This is different than the liability associated sole proprietorship in the way that personal assets of the business owner would not be at risk with an LLC. This means that liability is somewhat minimized. An LLC is seen as separate entity apart from the company and this means that personal assets can’t be taken if a judgment is made against the business.
2. Less Taxes
Another benefit of LLC that should be noted is the no double taxation. Many owners of traditional corporations are forced to pay taxes on profits both personally and corporately. However, this double taxation is not in place for owners of an LLC. Saving money on taxes allows you to add to your profits.
The Disadvantages of a LLC
1. No Wage
One big downside to having an LLC is that the owner is not permitted to give themselves a wage. All money that is taken out is done by profit distribution and is not an actual wage earned. It is important to note that all wage distribution is taxed. You even have to pay an additional self-employment tax and have taxes on non-distributed profits. This means that the tax liability on an LLC might be larger than other incorporation methods.