Advantages and Disadvantages of a Limited Liability Company

What entity structure do you choose? A lot of the time a Limited Liability Company is a good fit, but make sure you know and trust your partners. Below are some advantages and disadvantages.

Advantages

  • A limited liability company can have more than one member (owner.)
  • Members do not have to contribute money, they can contribute any tangible or intangible property in exchange for a membership interest.
  • Member interest is transferable.
  • All of the members have the benefit of limited liability from the obligations and liabilities of the entity, including if they participate in the management of.
  • Can be taxed as a partnership, on a Schedule C if a single-member LLC or husband-wife LLC, or elect to be taxed as a corporation.
  • If taxed as a partnership or on your personal return, the income of the business is only taxed once and losses can be used to offset other income.
  • A limited liability company taxed as a partnership can divide the gains and losses between the members for tax reporting without regard to how much capital they contributed.
  • A LLC taxed as a partnership can be converted to another business structure in a tax-free transaction.
  • A LLC can be managed by either its members or by a manager. This allows the LLC to choose the best structure for decision-making purposes.
  • If a manager-managed LLC, those that do not participate in the management do not have to pay self-employment taxes on their share of income.
  • If a manager-managed LLC, the business survives death or incompetence of a manager that is not a member.
  • No requirement to have formal meetings.
  • Depending on the State organized in, you may be able to withdraw and receive fair value of your interests from the limited liability company.

Disadvantages

  • Unless a manager-managed LLC, members will have to pay self-employment taxes.
  • Since all members and managers have the right to participate in management, disagreements between members can occur.
  • Other members or managers have the authority to bind the entity in the ordinary course of business.
  • All members must provide consent if transferring your interest to another party.
  • A limited liability company could be dissolved if a member withdrawals, dies, goes bankrupt or is otherwise incapacitated, unless there is an operating agreement in place that provides instructions as to what happens in the event of that happening to a member.
  • Requires a State filing in the State of organization and the States doing business in.
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