Before you start a limited liability company, you need to make sure this is the right business model for you. This setup works well for most startups, but it is not for everyone. In this two-part guide, we will go over the pros and cons of the LLC business model so you can decide if this is the best fit for your business goals.
Here is a look at the pros of starting an LLC.
With an LLC, you can have an unlimited number of members. You can establish a business with just one person in it, or you could have a crew of 1,000+ employees. The taxes will be reported differently for single- and multi-member LLCs (singles report as sole proprietorships), but the benefits remain the same throughout.
Note that LLC members are not just individuals. They can also be existing corporations or LLCs. This gives you the option to create an extra level of ownership for the business, with access to fringe benefits and extra liability protection.
Flexible Asset Allocation
The profits, losses, and assets of an LLC can be distributed disproportionally, meaning that a member with a small investment in the business can claim a large portion of the profits. With a shareholder structure, each shareholder earns a portion of the profits equivalent to his percentage of ownership. Members can contribute assets and loans to the LLC at any time, and an LLC can continue to exist after a member dies, per a unanimous vote from the remaining members.
Multiple Compensation Options
The members in an LLC can be paid through guaranteed payments or a distribution of profits, as agreed upon during the formation of the company. Guaranteed payments are exactly what they sound like – payments that some members are given regardless of the profits or losses for the company. Members may pay themselves by simply writing themselves a check from the business’s bank account, assuming the funds are available.
Limited Liability (Obviously)
The ideal reason to start a business as an LLC is because it is a “limited liability” company. That means that the members cannot be held liable for judgments or actions against the LLC. This includes actions taken against the members from the company itself. LLC taxes are still reported on personal tax returns, but liability remains on the business.
Check out the second part of this discussion where we go over the cons of starting an LLC.