Advantages and disadvantages of LLCs

Illinois residents who are thinking about establishing a small business as a limited liability company may be interested in reading about some of the advantages and disadvantages of this type of business structure. With roughly 2.4 million of them in existence around the country as of 2014, according to the IRS, they are the most popular type of business structure for many reasons.

LLCs allow people to enjoy the benefits of a partnership and the same liability protection of corporations. They have no limit to the amount of members, or owners, and members can consist of various business or individuals. Another great benefit of LLCs is that their members cannot be personally held liable for their company's actions as long as the business is operated correctly.

Since LLCs are considered pass-through entities, their members enjoy the company's profits without having to pay corporate-level taxes. Instead, members report the income on their federal income tax returns, which is much simpler. Likewise, if an LLC experiences a loss, its members can lower the tax burden by sharing the hit together.

However, there are some disadvantages to LLCs, such as an action that is known as piercing the corporate veil, which happens if an LLC is subjected to a court proceeding because of fraudulent activity, and the presiding judge rules that the LLC structure will not protect members' personal assets. LLC members are also responsible for paying self-employment tax because the structure is the same as a partnership, unless the members decide to pay corporate taxes. Members also must pay self-employment tax based on their share of the entity's net earnings.

Starting a small business involves many details, such as obtaining an Employer Identification Number. New business owners might benefit from speaking with an experienced business attorney who could help iron out various legal issues and explain the different types of business entities. Source: Market Watch, "The pros and cons of forming an LLC", Andrew L. Wang, March 23, 2017

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