Pros and Cons of a Limited Liability Company
A limited liability company (LLC) is a business structure permitted by state statue. A relatively new option for people forming a business, an LLC limits the liability of owners much in the same way as a corporation. Although the liability protection benefit of an LLC is one of the most important reasons for forming one, there are other pros as well as cons when considering an LLC.
Pro: No Limit On Members
An LLC allows for an unlimited number of members. However, if there is just one member, then the business is taxed as a sole proprietorship.
Pro: Limited Liability
Members of an LLC are protected from any liability incurred by the LLC or judgments against the company.
Pro: Earned Income
Members' shares of business profits is not treated as earned income, therefore self-employment tax can be avoided.
Pro: Lending Advantage
As an LLC member, you can lend money to your business from personal funds and remove money plus interest. You can also take a distribution of the business profit or receive a guaranteed payment.
Con: Tax on Profits
Each member of the LLC's proportionate share of the business profits is taxable income even if a member's share of those profits is distributed to them.
Con: Managing Partner Income
Although members avoid self-employment tax, the managing member's share of the profits is taxable.
Con: Members Share
Unlike the managing member who enjoys certain tax advantages, those tax advantages do not extend to the other members.
Con: Wages
Members of an LLC are not allowed to pay themselves wages.
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