What are the pros and cons?
There are many different business structures. The ones you're likely most familiar with are sole proprietorships and partnerships. In a sole proprietorship, you are the sole owner of the business. All of the business's assets are your assets, and you can be held personally liable for the business's debts. A partnership is similar, but two or more people share ownership and responsibility.
Many businesses start off as either sole proprietorships or partnerships, and these business structures can work for a while. However, most business owners reach a point at which they consider forming an LLC. An LLC, or limited liability corporation, is a business structure that establishes your business as a separate legal entity from you and other owners.
Is forming an LLC a smart choice for your business? That depends on a lot of factors. Consider the following pros and cons to help you decide.
Pros of Forming an LLC
You won't be personally liable for the business's debts and actions.
Say your business takes on debt that it cannot pay off. If your business is an LLC, this means that creditors cannot come after your personal assets to collect on that debt. This helps ensure that if your business fails, you don't lose your home and other personal assets. Also, if someone files a lawsuit against your LLC, that lawsuit will be against the business, only—not against you.
An LLC can be a pass-through entity for tax purposes.
You can form an LLC and still keep your taxes simple. Basically, you can set your LLC up as what's known as a pass-through organization. Any revenue that the business makes will still be considered your personal income and will be taxed as such. You don't have to worry about the complicated tax structures that apply to other types of corporations.
Forming an LLC is relatively easy and inexpensive.
Different states have varied requirements when it comes to forming an LLC. However, the process is quite simple across the board. Most people are able to fill out the necessary paperwork on their own. If you'd prefer to have some legal assistance, a lawyer should be able to help you set up your LLC within a single appointment. Fees for forming an LLC are usually a few hundred dollars, at most. This is a small price to pay for the legal and financial protections associated with forming an LLC.
Cons of Forming an LLC
You're responsible for keeping your business and personal assets separate.
By forming an LLC, you are legally separating yourself from your business. That means that you'll need to work to maintain that separation in your daily life. You'll need to have a separate bank account for your business. You'll need to track the business's expenses and debts separately from your own. This can take some getting used to.
If a member passes away or leaves, you must dissolve the LLC and form a new one.
If you form an LLC as a sole proprietor, this is not an issue. However, if you form an LLC with one or more partners, it is something to think about. If one partner passes away or voluntarily leaves the company, many states require that you dissolve the current LLC and form a new one, which can be a little time-consuming and cumbersome.
Forming an LLC is generally a good idea to limit your liability as you start or grow a business. As long as you're able to keep your personal and business assets separate and accept that changing ownership may require a lot of red tape, the pros tend to outweigh the cons for most business owners.