Pros and Cons of an LLC
LLC stands for “Limited Liability Corporation.” The name pretty much speaks for itself. The liability of the directors and shareholders are very limited as to threats from the outside world.
An LLC is a creature of statute. These entities are created through state laws that have been passed.
LLC’s have a distinct advantage over many other business structures for a couple of different reasons:
- they are easy to set up; and
- they restrict personal liability of each person associated; and
- they are not taxed as an entity.
An LLC does not typically issue stock shares to be publicly traded. The shares are usually privately owned. Although this may be a disadvantage in terms of raising capital, this factor can make ownership of an LLC substantially easier. The LLC is usually only “owned” by the board members, many of which are the shareholders.
Benefits of an LLC
There are many benefits to forming an LLC.
The first benefit an LLC provides is suggested right in its name – limited liability. If someone files a lawsuit against the LLC, the individual officers and shareholders are typically not personally liable on the judgment. The LLC is usually only liable for the sum of its assets. If the judgment against the LLC is for an amount greater than the company’s assets, the judgment creditor is out of luck. The judgment creditor cannot exhaust all of the LLC assets and later seek money from officers and shareholders, unless fraud can be proven and the corporate veil can be pierced.
Another major advantage of an LLC is the simple method in which it is taxed – or not taxed. Compared to a standard corporation, LLC’s have “flow-through” tax liabilities, meaning that the entity itself is not taxed – only the individuals making money from the LLC are taxed. Compare this to a standard corporation where many times the board members, the shareholders, and the corporation itself incurs a tax liability. Not having a potentially substantial tax burden can certainly add money to the bottom line.
No Annual Meeting Requirement
The last major advantage of owning an LLC is that there is no requirement to hold an annual meeting. In a corporation, the shareholders and board members usually must meet at least once a year to vote on corporate matters and elect officers. This requirement is not a statutory requirement of an LLC.
Remember, if you set up an LLC, you can usually reincorporate as a corporation later on if the need arises. The converse is not always true. It is very difficult, if not impossible, to reincorporate your corporation back to an LLC.
Ultimately, you will need to decide which business structure meets your needs. If you’re starting up an investment firm and looking to purchase expensive assets, you may want to consider compare business structures and find the one that will allow you to raise the most money. If your primary purpose is to shield the individual owners from liability, the LLC is likely your best bet.