Before you set up a limited liability company, you need to assess the positive and negatives. We have already explored the pros of starting an LLC. Now it is time to look at the other side. Here is some important information about the cons of the LLC business model so you can be sure this is right for you.
Taxable Income Is Not Always Your “Income”
Each member of the LLC will file profit and loss information as part of his personal tax return. The taxable income for each member is calculated by his percentage of ownership, even if the profits are not distributed that way. In other words, a member who did not earn any money from the LLC may still have to report taxable income from the company.
Possible Self-Employment Taxes
Managing members of the LLC must report their share of profits as earned income, which could be subject to self-employment tax. Since self-employment tax rates are higher than standard tax rates, this could cause the managing members to pay out more than other members for the LLC.
No Fringe Benefits For Base-Level Members
Non-managing members of the LLC cannot report their share of bottom-line profits as earned income, which means that they cannot quality for “fringe benefits.” This may help reduce their taxable income overall, but it could cut out on some tax breaks they receive too.
Potentially Short Business Life
If you do not set up your LLC properly, you may have to dissolve the company if a member leaves the business. Your business attorney can create provisions in your operating agreement to prevent this from happening, but this is a simple misstep that many startup companies are unaware of when they form their LLCs.
Do The Cons Outweigh The Pros?
For the most part, the pros greatly outweigh the cons of starting an LLC. With that in mind, this may not be the ideal business model for you. Compare the following features for different business structures to determine which one is right for you:
- Startup Costs
- Profit And Asset Allocation
- Number Of Members
- Number Of Employees
- Pyramid Of Ownership
- Operational Opportunities
Starting an LLC is easy and affordable, but that doesn’t mean it is exactly what you’re looking for. You may be better off buying an existing business or forming a corporation to carry out your goals. Make a plan for your business and determine which model works best for you.