A limited liability corporation or company is a company that has both the characteristics of a partnership or sole proprietorship and a corporation. It can have one or more members who are not legally responsible for the company’s liabilities. To be specific, it has the limited liability feature of a corporation and pass-through income taxation feature of a partnership. An LLC, as it is commonly known, has its own pros and cons. Some of them are discussed below.
Advantages of Limited Liability Corporation
1. Pass-through income taxation
Profits or earnings from businesses are generally subject to taxes. There are some federal taxes which the corporations are subjected to. But in case of LLC, the earnings from the company are considered as your personal earnings and therefore, they are not liable to taxes.
2. Limited liability
As already discussed, the members are not liable for the debts of the company. If something goes wrong, you can be assured that your personal assets like properties and bank accounts will be safe. The only loss incurred is the money you invest in the business. But it should be kept in mind that the rules of the corporation are strictly followed so that your assets remain protected.
3. Less restrictions
The management of an LLC is considered pretty easy. Lesser restrictions are imposed unlike the normal corporations. The company is devoid of a board of directors and annual gatherings. This protects the smooth working of the company where you have more freedom in the proceedings.
4. Allocation flexibility
In an LLC, the profit and loss percentage allotted to owners is not dependent on the money they have invested. This means that the capital they have invested is not equal to the percentage of ownership of the company. Suppose a person has invested 50% of the money. It is then not necessary that he has a 50% partnership of the company.
5. More foreign investors
Most countries are familiar with the concept of LLC even though it is new to the U.S. So, foreigners are ready to invest in it as they know its structure. Since LLC has lesser limitations, the U.S provides a good stable market for overseas investors.
Disadvantages of Limited Liability Corporation
Few demerits are also listed below.
1. Different rules across states
The rules pertaining to LLC are different in different states. This creates confusion if the business spans across more than one state. You will have to get acquainted with the rules of the particular states before starting the company. But it will be difficult to abide by all of them at the same time.
2. Higher fees
It is required to pay a fee to register as a limited liability company. It is generally seen that this fee is higher when compared to sole proprietorship. This may be because of the better protection available with the LLC. For some states, it is also required to pay an amount as yearly renewal fees.
3. Fewer case laws
It has not been a long time since the LLCs have established. So, there are not much case laws regarding LLC. This makes it less predictable when some problem arises in your company. If you have a clue about how the judgment is going to be from previous cases, you can take necessary steps accordingly. Lack of this provision puts you in a state of uncertainty.
4. Building capital
In corporations, the capital is built by shares issued by the company. This is not the case in LLCs where there are more legal formalities and state filings to add a new member. So, building funds is a major issue.
5. Lack of roles
Corporations have specific roles given to the members. But LLCs have not assigned roles like managers, employees etc to its investors. This creates confusion among them in certain situations where there is a need to sign a contract or manage the funds.