This week sees us reach the end of our recent series of articles covering the most common types of business structure used by small business owners. Last week, we investigated the pros and cons of S corps, a special kind of corporation that helps small business owners avoid the problem of double taxation.
This time around we’re exploring Limited Liability Companies (LLCs), a business structure that takes advantage of the benefits of both corporations and partnerships.
As the name suggests, LLCs offer business owners a degree of protection from personal liability, meaning personal assets typically won’t be at risk should the business face financial difficulties.
Like S corps, LLCs also avoid the issue of double taxation, with profits and losses ‘passed through’ to the business owner’s personal income. Unlike S corps, LLCs don’t need to adhere to any particular corporate structure, meaning they’re relatively flexible when compared to other traditional business structures.
Here are the pros and cons of LLCs:
- Limited Liability – in most cases (though not all), the owner’s personal assets will not be at risk in the event their company experiences financial difficulties.
- No double taxation – as a pass-through entity, LLCs avoid the double taxation issue some other business structures face.
- Flexible structure – LLCs are more flexible than corporations. They can, for example, be managed by their members, or by managers, which can be particularly useful if members aren’t experienced in the running of businesses.
- No stock – unlike corporations, LLCs don’t have shares or stock certificates to offer. This can make raising capital a challenge.
- Pricier staff incentives – also unlike corporations, owners of LLCs aren’t able to deduct the cost of benefits from profits, meaning it can be more expensive to offer staff incentives.
- Limited life – in many states, LLCs have a limited life and must be dissolved if a member leaves the company, goes bankrupt, or dies.