Explanation of LLC - Pros and Cons

Before you start an LLC (Limited Liability Company) you need to know what it is first. This will allow you to be more objective when deciding whether an LLC is the best type of business for you.

Though an LLC can have a similar structure as a partnership or a corporation, it is neither. Unlike a partnership, the percentage of company ownership isn't 50-50 - you have more flexible options than that. Also, the owners or founders of Limited Liability Companies are often called members. You never use terms such as CEO, CFO, or COO, because those terms are meant for people working in a corporation. Also, unlike a corporation, you can't sell or give away shares of the company. The term "limited liability" comes from the fact that LLC owners and members are not personally liable for debts and payments made under the LLC. This is why many new entrepreneurs set up LLCs - they don't want the legal and fiscal complexity of a corporation, but they want to keep business and personal assets separate.

Now that you know what an LLC is and isn't, it's time to look at its advantages and disadvantages.

Limited Liability Companies - Advantages

Flexible taxes. An LLC can be taxed as a sole proprietorship, partnership, or as a corporation. This ability to choose allows you to select the taxation system that suits your business (or your wallet!) the best. Don't worry, whatever method you choose, you won't encounter double taxation. You'll only be taxed on the same income once.

Limited liability. As mentioned earlier, the members of an LLC are protected from the debts and expenses of the LLC. Normally this means that if an LLC is sued, any assets that may be seized must come from the business funds of the LLC and not from the personal funds of the members. Protection coverage varies from state to state.

Less paperwork. Unlike having a corporation, there's usually less documentation and paperwork required of LLCs. Again, this would depend on the state that the LLC is operating in.

Limited Liability Companies - Disadvantages

Raising capital. If you're looking for outside investors, it might be harder to acquire funding since most venture capitalists prefer to invest in corporations - which tend to be more long lasting and has the option to eventually sell shares or stocks. One way that some investors minimize the risk to themselves is to require the members of the LLC to personally guarantee the return on the investment, defeating the purpose of limited liability.

Firm operating agreements. In some states, Limited Liability Companies with multiple members are required to submit an operating agreement. This defines the role and responsibility of each member. But this isn't a requirement in most states. The problem is that without an operating agreement, it's unclear who's in charge of making specific decisions in the LLC.

Shorter lifespan. Unlike corporations, Limited Liability Companies don't last forever. If a member dies, becomes bankrupt, or wants to leave the LLC, the entire company has to dissolve. If they want to continue the business, they'll need to form another LLC.