Your business needs a corporate structure to protect you and your assets. An LLC is a popular type of structure. An LLC is a “limited liability company.” It can have one owner, or member, or it can have many. Members can even be businesses themselves. The main advantage to an LLC is that it protects your personal assets from your business’s creditors.
You should discuss the pros and cons of an LLC with your business advisor when you’re getting started, because the corporate structure will impact your business for a long time.
Pros of an LLC
As noted, an LLC protects your personal assets from creditors who want to collect from your business. Of course, you have to run your business well and keep your personal and business finances separate. But the other common benefit is how profits are taxed. Profits can be distributed to the members directly. The government doesn’t take company-level taxes. Members pay taxes on the profits on their personal federal income tax report.
An LLC has management flexibility. The members can choose to manage the business, or managers can be hired from outside the members. It’s also very easy to set up an LLC. Most states have a small filing fee of $50 to $100 and annual requirements.
Cons of an LLC
Self-employment tax can be expensive. Members are responsible for paying Social Security and Medicare taxes on their profits, unless the LLC files forms to be taxed as an S Corporation. You should discuss this with your tax advisor.
An LLC only protects your assets if you run the business separately from your personal life. Member turnover can be quite complicated. If a member dies, the LLC may need to be restarted from scratch. Some VCs can’t invest in an LLC.
Bottom line, it’s important to consider the corporate structure of your business. 5 Star Funding Group offers financing to help you grow your business. Contact us today.