Business formation can help determine an owner’s success and resolve their potential problems. For example, there are business and commercial law advantages and disadvantages of establishing a limited liability company.
LLCs
An LLC is a business structure that has the simplicity, flexibility, and tax benefits of a partnership along with the personal liability protections of corporations.
Its owners are called members. Individuals or other businesses may be members and there is no limit on members that LLCs can have. A member’s personal assets receive protection from businesses’ creditors.
Advantages
LLCs have several benefits. Most notably, members are not legally liable for their company’s actions. Their homes, vehicles, financial accounts and investments are protected from business creditors.
LLCs are pass-through entities where profits go directly to their members without being taxed at the company level unless it opts otherwise. Members pay tax on their profits on their personal federal tax returns. This is easier than the business being taxed on the corporate level and members can lower their tax burdens if the LLC loses money.
Members can manage an LLC and all owners can participate in its daily operations. Professional managers, who may be members or outsiders, can also mange operations.
State registration paperwork and fees are comparatively light. Although the process is relatively simple, attorneys and accountants can help with their expertise.
Disadvantages
A judge can pierce the corporate veil and rule that an LLC does not protect personal assets. This occurs when members do not clearly separate business and personal transactions or if a member runs the business fraudulently.
The IRS classifies LLC as partnerships for taxes unless its members elect to be taxed as a corporation. If the LLC is taxed as a partnership, members are considered self-employed and must pay Social Security and Medicare taxes based on the business’s total net earnings.
If the LLC files as an S corporation with the IRS, owners who work for the company must pay Social Security and Medicare taxes only on their actual compensation instead of on all of the company’s pretax profits.
New York has legal requirements for filing and operating LLCs. Compliance is important.