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The pros and cons of structuring a new company as an LLC

On Behalf of | Mar 28, 2024 | Business Law

When launching a new business, one of the first legally-related decisions you’ll need to make involves choosing your company’s legal structure. Among the various options, limited liability companies (LLCs) serve as a “middle ground” between the more extreme options of corporations on one hand and sole proprietorships or partnerships on the other.

LLCs are popular among entrepreneurs across a wide range of industries. An LLC is a flexible business entity that blends the characteristics of both corporations and partnerships or sole proprietorships, which results in a largely favorable hybrid structure. With that said, this structure is not for everyone, so it’s important to weigh the advantages and drawbacks of this option before committing to an approach. 

Pros of structuring as an LLC

Perhaps the most significant advantage of an LLC is the legal protection it offers its owners, referred to as “members.” LLCs can be owned by a single member or multiple members. Members’ personal assets are generally protected from business debts and lawsuits against their company. This means that, in the event of financial trouble, creditors can’t pursue the personal assets of the company’s members.

Additionally, LLCs are not bound by the stringent operational requirements and formalities that corporations must follow. This flexibility allows for easier management and can be particularly advantageous for smaller businesses.

Cons of structuring as an LLC

While the (default) pass-through taxation of an LLC can be advantageous, it also means that earnings are subject to self-employment taxes. This aspect can potentially increase the tax burden on LLC members, though proactive tax planning can mitigate some of these effects.

It is also worth mentioning that the rules and regulations governing LLCs can vary significantly from one state to another, potentially complicating interstate business operations. This variation requires businesses to be well-informed about the laws in each state where they operate, which can add to administrative burdens.

Finally, although structuring as an LLC is less burdensome than structuring as a corporation, forming and maintaining an LLC still involves certain costs and administrative requirements, such as filing Articles of Organization and paying ongoing fees. These requirements, while manageable, do add an administrative layer that sole proprietorships and most partnerships do not face.

Structuring as an LLC may or may not be in your new venture’s best interests. By carefully weighing the pros and cons of this arrangement, you can certainly place yourself in a stronger position to make an informed decision either way.