Free Essay: Pros and Cons of a Limited Liability Company
A Limited Liability Company is one which the members are not personally personally liable for the company’s debts or liabilities. There are a number of business structures available for people who are planning to start up businesses. Most companies that are starting small will start as sole proprietorships. No matter what kind of structure one chooses, it is important to understand that the kind of business structure a business operates on has various implications including financial implications. In this essay we will take a look at the Pros and Cons of a Limited Liability Company.
Before setting up a company as a limited liability company (LLC), it is important to understand what it is all about. This kind of business structure works very well for some businesses but it may also not work for others. Therefore, one must understand the advantages and disadvantages of applying this structure before taking the plunge. There are a number of things that you must consider depending on the state where your business will be located.
The Limited Liability Company business structure involves ownership of the business by a number of individuals or members. The business could have a single managing member who is the person who plays the hands-on function of running the business. The income generated from businesses run using this structure is not considered under the self employment tax regulations. The business owners have to understand all aspects about this kind of structure so as to make the right decision based on its advantages and disadvantages.
Since the Limited Liability Company structure allows for a single member manager, the income from the business is taxed as a sole proprietorship. Limited Liability Companies allows for favorable taxation rates in comparison to other kinds of business structures.
The members of a business operating under the Limited Liability Company structure enjoy favored fringe benefits. In the Limited Liability Company business structure, members can pay themselves by simply writing checks when the company has the money to afford the same. The members of the company can distribute the profits brought in by the company as they like.
As much as the other members in the company can enjoy the profits distributed to them without having it taxed, the managing member feels the pinch. The managing member’s share of the company profits is considered earned income and it is therefore taxable by law. The managing member will have to pay a self employment tax. The rest of the members are considered inactive and they therefore do not have to pay any individual taxes from their share of the profits.
The Limited Liability Company business structure presents the challenge of getting reliable financing. Financial institutions will be hesitant about lending money to companies that run under the LLC business structure in comparison to corporations. Most institutions may regard such a company as being less professional or not financially stable. They may therefore find it risky to put their money there. In some states, a company run using the Limited Liability Company business structure may have to pay extra taxes. They may be required to pay the capital values tax.
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