Are you wondering what does LLC mean? If you’re going into business for yourself, it will pay to learn more about this type of business entity. What are the advantages and drawbacks?
When a business reaches a certain point, some may wonder if it is wise to change from a sole proprietorship to an LLC. Of course, there are a huge number of benefits to forming an LLC vs. maintaining a sole proprietorship or launching an S Corporation.
Then again, there are a few minor disadvantages. This is why it is important to clearly examine the various pros and cons associated with forming an LLC.
Above all, the main advantage of forming an LLC is that personal assets remain protected. The debts and liabilities of an LLC belong to the LLC and are not attached directly to the individual members.
This is a major positive aspect of an LLC over a sole proprietorship in learning what does LLC mean for your personal asset protection. Simply put, it is economically unwise to have your personal assets at risk whenever you conduct business.
Additionally, LLC’s are taxed in a manner similar to a partnership as opposed to the double taxation method imposed on a corporation. That is, with a corporation one will be required to pay business taxes as well as personal taxes. LLC’s profits/losses are presented on the individual member’s tax returns; the LLC itself does not have to file taxes. This provides a significant monetary savings.
What does LLC mean to My Business?
While there is paperwork and fees involved with forming an LLC these are miniscule compared to what you would have to contend with when forming a corporation. In addition, forming a corporation would probably require significantly more in professional services such as attorneys, accountants, etc and this would obviously come with more costs as well. An LLC would not only be less costly to form; it is also less costly to maintain.
But are there any disadvantages of forming an LLC? Well, nothing is perfect and there are a few minor negatives associated with an LLC. Unlike a sole proprietorship, you cannot just “announce” an LLC. Forms (such as articles of incorporation), paperwork and fees must be filed with the state so as to legally establish the LLC as a separate business entity. Again, this is a minor negative as taking these steps provides a number of protections.
In terms of more serious negatives, there may be issues with raising capital. Of course, most people want to grow their business and this requires capital. For many businesses, investors are relied upon for an influx of cash. While it is not without precedent for LLC’s to raise private equity investments, investors often feel more secure with investing in a corporation.
This is because if a member of an LLC passes away or files bankruptcy the LLC is no more. With a corporation, the business entity would still exist even after such situations occurred. As such, an LLC may prove to be a hurdle in the investing arena. Also, if you are interested in taking the company public, however, this may prove significantly more difficult with an LLC. If this is your goal then forming a corporation would be a better idea.
So, if you are unsure as to whether or not to form an LLC then it is best to weigh the pros and cons. Then, make a decision based upon what’s best regarding your own personal situation. Learn what does LLC mean and how it can protect you and your business.