Advantages & Disadvantages of LLC
Advantages of LLC
Limited Liability of the owners is the first and most important one. Members of a LLC benefit from the 'limited liability' characteristic of this legal entity and are protected from personal liability for business disputes that arise between the LLC and a third party. This means that if the LLC incurs debt or is sued, members' personal assets are usually exempt. This is similar to the liability protections afforded to shareholders of a corporation.
Less Formalities. LLC's laws in most states require much less formalities and Less Recordkeeping compared to a corporation. As such, there is less registration paperwork and there are smaller start-up costs.
Profits distribution. Members can distribute profits with much less restrictions than in a corporation. Ownership ratio can be different than profit distribution ratio and not necessarily tied up to each member's investment.
Disadvantages of LLC
Limited Life. In many states, when a member leaves an LLC, the business is dissolved and the members must fulfill all remaining legal and business obligations to close the business. The remaining members can decide if they want to start a new LLC or part ways. However, you can include provisions in your operating agreement to prolong the life of the LLC if a member decides to leave the business.
Self-Employment Taxes. Members of an LLC are considered self-employed and must pay the self-employment tax contributions towards Medicare and Social Security. The entire net income of the LLC is subject to this tax.