Pros and Cons of Starting an LLC
An LLC is a limited liability company, which is a hybrid business entity that allows for the tax advantages and flexibility of a partnership with the liability protection afforded by a corporation. In a corporation, owners are called shareholders. With an LLC, they are called members. There is no limit to the number of members an LLC can have.
If you have questions on forming an LLC or another business entity, it’s important to speak with a District of Columbia business law attorney who can assist you with choosing the right business structure for your particular situation.
Pros of Forming an LLC
There are a number of pros with an LLC, which is why it’s such a popular business structure. One of the main benefits is the fact that an LLC offers some limited liability protection. This means members are not personally liable for the actions of the business, and personal assets are not at risk from the creditors of the LLC.
Another benefit with LLCs is the pass-through federal tax benefits. Unless an LLC decides otherwise, an LLC will be treated as a pass-through entity, which means profits are distributed to members without being taxed on a federal level. Members are required to pay federal taxes on their personal income tax returns.
LLCs offer flexibility in the management structure side of things as well. You have the option to have all members involved in the day-to-day business operations. Or, you can choose a manager, or managers, to run the business. Managers can be members themselves, or they can be hired from the outside. For people who aren’t well-versed in running a business, hiring outside managers can often be easier.
Cons of an LLC
Every business structure has its potential negatives, and LLCs are no exception. One of the biggest concerns is the fact that limited liability protection is just that — limited. If a judge rules that the LLC is not protected, it’s known as piercing the corporate veil. This can happen if you don’t separate personal transactions from business transactions for example.
If your LLC decides to be taxed as a partnership, it means the government will consider the members to be self-employed. You will be responsible for paying your Medicare and Social Security taxes, which are known as self-employment taxes.
Depending on where you plan to do business, some states require the LLC to be dissolved if a member dies, leaves the business, or goes bankrupt. The remaining members will be responsible for any remaining financial and legal obligations before the business is terminated.
If you are hoping to raise capital from investors, an LLC might not be the right option. Because there is not a strict business structure and because of the pass-through taxation, some investors may be hesitant about investing in an LLC.
Retaining a Washington DC Business Lawyer
If you need assistance with setting up a business entity, it’s recommended you speak with a District of Columbia business law attorney first. At Tobin, O’Connor & Ewing in Washington DC, we help small businesses determine what type of business entity is best for your particular situation and business goals. Contact our office today to schedule a consultation.